VAT rate may be raised to curb budget deficit

VAT rate may be raised to curb budget deficit

JAKARTA (JP): With the 2001 state budget deficit threatening
to reach critical levels, one option available to the government
to check the deficit is increasing the value added tax (VAT),
which currently stands at 10 percent.

Director general of taxation Hadi Purnomo said on Thursday the
easiest way to increase tax revenue in a very short period was to
focus on "indirect taxes", particularly VAT.

"Yes, there have been some demands to raise the VAT rate, but
we have not yet decided on this ... According to the VAT law, the
government can raise the VAT rate up to 15 percent," he said.

But some observers fear raising the VAT would have a negative
impact on the business sector by cutting into sales volume.

A number of economists warned earlier the business sector
would have to shoulder the burden of the budget deficit,
particularly those businesses offering goods and services for
middle to upper-income people. They said it would be political
suicide for the embattled government to impose new burdens on
low-income people.

Hadi declined to disclose the new tax revenue target, saying
the overall state budget revision was still being discussed by
senior economic ministers and had yet to be delivered to the
House of Representatives for approval.

But he said the provisional figure ranged from more than Rp
180 trillion (US$16.33 billion) to nearly Rp 190 trillion. The
original tax revenue target for 2001 was Rp 179.89 trillion.

Hadi said the preliminary figure for the revised VAT receipt
target was between Rp 57 trillion and Rp 59 trillion, compared
with the original target of Rp 48.85 trillion.

The budget deficit this year could widen to the critical level
of 6 percent of gross domestic product (GDP), from the initial
projection of 3.7 percent of GDP. This widening is primarily the
result of the sharp plunge of the rupiah against the U.S. dollar
and rising domestic interest rates.

The government has said it is determined to check the budget
deficit at about 3.8 percent of GDP by introducing several
measures focusing on increasing domestic tax revenue and cutting
subsidy spending, notably on fuel products.

Coordinating Minister for the Economy Rizal Ramli said on
Wednesday the government might have to increase fuel prices by an
average of 30 percent later this year if the fuel subsidy in the
state budget was to be cut by about Rp 5.6 trillion, as was
originally planned.

Rizal, however, said any fuel price increase should not affect
those in the lower income brackets.

The government was to have submitted the budget revision to
the House last week, a deadline it obviously missed. Minister of
Trade and Industry Luhut B. Pandjaitan said the government would
submit the budget revision after it was finalized by the Cabinet
on May 16.

However, according to sources this deadline may also be in
danger. The sources said the government had yet to decide on
several crucial issues, particularly taxes and the fuel subsidy.

Rizal admitted on Wednesday that cutting the fuel subsidy by
raising fuel prices was a difficult choice for the government
because of the possible political consequences.

He pointed to the increase in fuel prices in April 1998 which
led to social unrest and the eventual downfall of former
president Soeharto in May of that year.

The House's approval of the budget revision is a prerequisite
for the International Monetary Fund to disburse the third $400
million tranche of its $5 billion bailout program for Indonesia.

Rizal said President Abdurrahman Wahid met with IMF Jakarta
representative John Dodsworth and World Bank country director
Mark Baird on Thursday to discuss the budget revision.

Elsewhere, Hadi said tax revenues in the first four months of
this year totaled Rp 53.5 trillion, higher than the Rp 52.2
trillion target.

The director for tax planning and revenue, Petronius Saragih,
said income tax revenue in the January-April period was Rp 35.2
trillion, value added tax and luxury sales tax revenue was Rp
16.5 trillion, land and building tax revenue was Rp 1 trillion
and the revenue from other taxes was Rp 718 billion.

Petronius said the oil and natural gas industry accounted for
Rp 9.2 trillion of income tax receipts, the result of
higher-than-estimated oil prices and the depreciation of the
rupiah against the U.S. dollar.

Other sectors accounted for Rp 25.9 trillion of total income
tax revenue, which was well below the targeted figure. (rei)