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Discourse: Tax reforms should be next year's top priority: Chatib
Four years ago today, Finance Minister Muhamad Chatib Basri was a university lecturer known among his students for his fondness for wearing oversized batik shirts to class
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Four years ago today, Finance Minister Muhamad Chatib Basri was a university lecturer known among his students for his fondness for wearing oversized batik shirts to class. Since then, he has enjoyed a quantum leap in his career, taking over as the chief of the Investment Coordinating Board (BKPM) in 2011, before becoming the chief pilot of Indonesia's economy in 2013. The 49-year-old economist, rumored to be among the strongest candidates for the role of finance minister in the Cabinet of president-elect Joko 'Jokowi' Widodo, recently talked to The Jakarta Post's Satria Sambijantoro and Vincent Lingga on the outlook of Indonesia's fiscal policies.
Question: What's the biggest challenge in the fiscal sector facing the next government?
Answer: We need to fix our taxation system, which currently depends too heavily on corporate income from mining and plantation companies. This happens because collecting taxes from such sectors is relatively easy. Many refer to this as 'hunting animals in a zoo'.
It is not healthy to derive corporate income tax receipts mostly from natural resource commodities. This is because we will face a battering where commodity prices would continue to decline, ultimately leading to a tax revenue shortfall. The natural resource boom is over. As the United States has virtually achieved energy security, the economic powerhouse will depend less on oil from the Middle East, while Indonesian commodity prices are influenced by energy prices.
If we want to fix this issue, then the first thing we must do is diversify our tax income into the property services sector and other manufacturing industries, although of course it would take new knowledge [for tax officials] to suddenly tap into new sectors such as property, which now is subject only to a flat tax at a very low rate. Look at how well our financial services sector has performed over the past few years. But, how much income tax have we generated from it? It's about fiscal sustainability. I'm sure if we could undertake reforms here, our primary balance in the state budget could see a surplus within two years.
Why does government and public debate on energy reform focus on the need to hike fuel prices, instead of first promoting the design and components of social safety-net programs in anticipation of higher fuel prices?
What I regret here is that the discussion [in the media] does not touch the substance of the issue, such as how the social programs should be designed and implemented, the magnitude of the fuel price hike, etc. Instead, the debates end up as political gimmicks.
Actually, if [the next government] wants to hike fuel prices, all the requirements are already there. I have anticipated this since early this year: a fuel price hike could be implemented whenever necessary, even as early as this coming November [one month after the new government takes over]. This is why the [revised 2014 state budget] already makes it possible for the government to raise fuel prices without prior approval from the House of Representatives.
Second, I realized that every time the government hikes fuel prices, it will need approval from the House regarding the social safety-net programs. During the deliberation of the revised 2014 state budget, I included appropriations for the social program amounting to Rp 5 trillion [US$417.71 million], under the classification of a 'social safety net' item. This amount is sufficient for three months of compensation for the poor in case the new government decides to immediately hike fuel prices. It's like a blank check. If one wants to hike fuel prices, then the programs are already there. The decision then lies with the government itself.
Then if the time to prepare for a comprehensive compensation program to support a fuel price hike is limited, why not just copy the compensation programs used when the government raised fuel prices last June? We already have the database of poor people, provided by the TNP2K [the National Team for Accelerating Poverty Reduction].
But the public debate on the fuel subsidy also seems to have created the perception that the current government is set to leave behind a fuel-subsidy time bomb for the new government.
Again, I regret that such an impression has occurred. In fact I have ensured that the new government has the most flexibility possible in the state budget. For example, there's a clause [in the proposed 2015 state budget] stipulating that, in pressing circumstances, the government could just issue bonds or utilize SAL [unused excess funds from the previous state budget] for financing. This is to prevent future problems when, say, the new finance minister suddenly bumps into problems but [he or she] is yet to be updated on recent economic issues.
When I became the finance minister, I immediately became a fire extinguisher because as soon as I entered office, we bumped into this whole 'Fed tantrum' thing [easing of stimulus]. Yes, we succeeded in managing the financial crisis. But, as a consequence, there are some reforms left unfinished. I should have been able to spend more time on reform in the taxation sector. We need to look again at the tax structure ratio, restructuring the four layers of the individual income-tax rates, which have been seen as too much in favor of upper middle- and high-income people.
You promised to finish the regulations on non-repatriation tax incentives for foreign companies that reinvest their earnings here, as well as tax incentives for companies allocating funds for research and developments purposes. How is the progress?
The draft is ready. But, personally I am not too happy with the result because our tax laws forbid companies from receiving allowances that are too big. We must acknowledge that the impact from the policy may be limited, given our time constraints. Moreover, under this scheme, the tax incentives scheme would be enjoyed only by companies already eligible for tax allowances. So, the scope of companies may be limited. But I only have one month left in office so I must be realistic.
