Govt must create business-friendly tax regime: Experts

Urip Hudiono, The Jakarta Post, Jakarta

This year's sluggish start to the collection of tax revenues shows the remaining problems in the government's taxation policies, analysts say, particularly in its failure to make taxes and economic growth support each other.

Analysts have suggested the government must start employing such a mind-set within its current tax reform effort to revise Indonesia's existing tax laws to create a more business-friendly tax regime in the country, while continuing to hammer out the notorious corrupt practices in the country's tax office.

"An amendment to our tax laws is a must because our current tax regime is no longer suitable for today's business and investment needs," economist Sri Adiningsih of the Yogyakarta-based Gadjah Mada University told The Jakarta Post.

"ASEAN's free trade and investment area, for example, will come to its full extent in 2010 -- that's only three years from now -- so we have to come up with a more competitive tax regime."

Sri Adiningsih agreed that implementing a "competitive" tax regime usually translated to the lowering of tax rates, which could result in even lower tax revenues in the short term.

She said, however, that in the long-term it would encourage more growth-stimulating businesses and investments to come into the country, as long as the government's other policies of eradicating corruption and reducing the bureaucracy causing the country's current high-cost economy supported it.

"More businesses and investments growing healthily will eventually lead to more tax revenues. This is tax regime design matching growth needs," she said.

Worldwide studies by economists have suggested that when income taxes and import duties are too high they are detrimental to a country's economic growth, and have advised policy makers to instead focus on sales, luxury and value-added taxes.

The government has fallen behind in its tax collection, only reaping Rp 105 trillion (US$11.6 billion) in this year's first four months -- or 29 percent of the year's target -- despite a 24 percent increase from the same period last year. Customs and excise revenues saw a similar situation, rising only 6 percent to Rp 15.4 trillion.

Finance Minister Sri Mulyani Indrawati said the reversal was the result of many businesses experiencing hard times during the recent economic slowdown.

Indonesia's economy grew by only 5.3 percent in the first quarter, far from its full-year target of 6 percent.

Though most businesses in the country pay taxes, only some 10 million citizens are registered taxpayers, the government said.

The government's tax law amendments to improve the tax ratio are in deliberation, but have been challenged by businesses citing concern over the still powerful tax office, renowned for graft.

Sri Adiningsih warned the government to be careful when targeting small taxpayers so as not to discourage small and medium-sized enterprises, which have proven to be the economy's backbone in times of economic crisis.

Legislator Dradjad H. Wibowo of the National Mandate Party agreed with improving the tax regime through amendments, as well as fully reforming the tax office.

"If the government is serious in improving the tax office's performance, then it should consider separating it directly under the President, like the Internal Revenue System (IRS) in the U.S., Australia and Japan," he said.
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