Jurnal Infestasi VVool.l .3 3 N, 0N.1o .2 100, 7Juni 2007 Jurnal Infestasi 10 Hal. 10 - 27 THE SMES IN ORDER TO FACE THE AFTA AND GLOBALIZATION ERA Gita Arasy Herwida Fakultas Ekonomi Universitas Trunojoyo Abstract: Small and medium enterprises (SMEs) have contributed much to the growth of the economy in Indonesia. Further, this sector is also famous for its survival during the economic crisis in the late 1990’s or specifically the crisis began in the late 1997. The survival of the SMEs in Indonesia from that crisis has alerted the government and economic societies for not only concerning the economic development to the large enterprises as most of those large enterprises were collapsed during the crisis. Prior the crisis, the government focused on the development in capital tight industrial sectors in a big capital such as: in banking and manufacturing for mass production. Most of policies that were issued at that time enhanced the development of this sector such as: policies that eased inward investment in some particular business; policies to provide value added tax exemption in the bounded zone area, etc. If we look back to the crisis time, the collapse of the large enterprises was mainly caused by their lack of ability in paying their overseas debt, which was in US dollar currency. The SMEs could survive mainly because of two reasons. First, the SMEs’ business is mostly export oriented. They gained advantage from the payment which was in US dollar. The foreign exchange of US dollar to Indonesian currency, Rupiah, during the crisis was increased amazingly more than four times from the previous value. Second, most of the SMEs did not have liability with the foreign banks or foreign parties. Thus, they did not have to pay any liabilities in US dollar. This was in contrast to the large enterprises which mostly had liability with the foreign banks or parties. They had responsibility to give payment in US dollar which meant that their liability amount rose parallel to the increasing of US dollar’s value. The flexibility of the SMEs in their working capital side was one of their key factors in their survival from the crisis. The SMEs do not rely on their all working capital on foreign debt, they use their own capital or may have debt from local sources. Actually the government has already established a new department in regard to the development of the SMEs. The department is under the Ministry of Coopertives and Small Enterprises which was established in 1993. This department has also issued some policies and strategic programs for the development of the SMEs and the cooperatives sector in Indonesia. The core objective of the establishment of this department was to overcome the difficulties which were faced, either externally or internally. However, the crisis effectively encouraged the government to give more attention to the SMEs. This was in terms of giving them 10 11 Herwida Jurnal Infestasi more opportunity to grow further to become strong large entities, rather than merely remaining at the small and medium stage. Another fact is that the SMEs are able to provide wide job opportunities, which Indonesia requires to deal with the increasing number of unemployment. Keywords: Small and Medium Enterprises, foreign debt, working capital I. INTRODUCTION Overview of Small and Medium Enterprises in Indonesia Small and medium enterprises (SMEs) have contributed much to the growth of the economy in Indonesia. Further, this sector is also famous for its survival during the economic crisis in the late 1990’s or specifically the crisis began in the late 1997. The survival of the SMEs in Indonesia from that crisis has alerted the government and economic societies for not only concerning the economic development to the large enterprises as most of those large enterprises were collapsed during the crisis. Prior the crisis, the government focused on the development in capital tight industrial sectors in a big capital such as: in banking and manufacturing for mass production. Most of policies that were issued at that time enhanced the development of this sector such as: policies that eased inward investment in some particular business; policies to provide value added tax exemption in the bounded zone area, etc. If we look back to the crisis time, the collapse of the large enterprises was mainly caused by their lack of ability in paying their overseas debt, which was in US dollar currency. The SMEs could survive mainly because of two reasons. First, the SMEs’ business is mostly export oriented. They gained advantage from the payment which was in US dollar. The foreign exchange of US dollar to Indonesian currency, Rupiah, during the crisis was increased amazingly more than four times from the previous value. Second, most of the SMEs did not have liability with the foreign banks or foreign parties. Thus, they did not have to pay any liabilities in US dollar. This was in contrast to the large enterprises which mostly had liability with the foreign banks or parties. They had responsibility to give payment in US dollar which meant that their liability amount rose parallel to the increasing of US dollar’s value. The flexibility of the SMEs in their working capital side was one of their key factors in their survival from the crisis. The SMEs do not rely on their all working capital on foreign debt, they use their own capital or may have debt from local sources. Actually the government has already established a new department in regard to the development of the SMEs. The department is under the Ministry of Coopertives and Small Enterprises which was established in 1993. This department has also issued some policies and strategic programs for the development of the SMEs and the cooperatives sector in Indonesia. The core objective of the establishment of this department was to overcome the difficulties which were faced, either externally or internally. However, the crisis effectively encouraged the government to give more attention to the SMEs. This was in terms of giving them more opportunity to grow further to become strong large entities, rather than merely remaining at the small and medium stage. Another fact is that the SMEs are able to provide wide job opportunities, which Indonesia requires to deal with the increasing number of unemployment. Vol. 3 N0.1 2007 Jurnal Infestasi 12 Since the establishment of this department, many policies have been introduced which emphasize the capital sufficiency using the soft debt policy and up skill management strategic programs for the SMEs entrepreneurs. Nevertheless, the SMEs have expressed disappointment. They especially doubt the willingness of the government in the implementation of the program. Furthermore, they doubt the government’s seriousness in preparing the SMEs to face the globalization particularly the commencement of the ASEAN free trade area (AFTA). The problems that have to be faced by the Small and Medium Enterprises (SMEs) in Indonesia may continue to worsen as the ASEAN Free Trade Area (AFTA) will be introduce completely in the near future. The SMEs will have to compete with foreign companies which invest in Indonesia. Their sales may not be as high as before. Considering that income tax could account for at least 10 % to 30% or 20% in average of their expenses the working capital for the following years will also be decreased. This essay will argue whether the existing tax concessions provided for the SMEs in Indonesia are sufficiently support the SMEs in order to face the AFTA and globalization era. This article will analyze the Indonesian tax legislation which deal with the SMEs in Indonesia and will compare it to the Australian tax legislation for the SMEs. Each analysis of Indonesian and Australian tax legislation will be supported by some written opinion, evidences from journals and articles. In this article, the Australian tax legislation for SMEs is used for a role model which objective is to give an overview and comparison for Indonesia in providing tax legislation and tax concession for the SMEs. The first section will provide various definitions of the SMEs in Indonesia. The second section will discuss the role of the SMEs in Indonesia’s economic development. The third section will discuss the AFTA, and identify problems that will arise for the SMEs. The fourth section will discuss whether or not Indonesia provides adequate tax concession for the SMEs. The writer will provide some existing tax regulations and policies that are related to the SMEs, and evaluate the effectiveness of the existing policies. The fourth section will confer some tax concessions provided by two developed countries, Australia and the UK, as a comparison model. The fifth section will identify the appropriate tax concessions for the SMEs in Indonesia. This section will also argue that Indonesia should adopt some tax concession from other countries with some adjustments. What are the SMEs? The SMEs have several definitions; every government department provides a different definition of SMEs. The definition of SMEs states at the Law no.9 of 1995 are small enterprises which are owned by Indonesian citizens, independent or not affiliated with other enterprises (subsidiary or branch) with or without legal licensing. Furthermore the classification of SMEs in term of assets and annual sales are as shown in Table 1 below: 13 Herwida Jurnal Infestasi Table 1. The Definition of SMEs in Indonesia Due to The Amount of Assets and Annual Sales SMEs are defined as: Small With assets of < Rp 20 million Annual sales Enterprise (excluding land and building) volume not more than Rp.1 billion Medium With assets > Rp 20 million Annual sales Enterprise (excluding land and building) but volume is > < Rp.10 billion(US$1.176 million) Rp.1 billion Source: SME Profile in ‘http://www.actetsme.org/indo/indo2000.htm’ (2005) According to Table 1, the categorization of the SMEs from the annual sales amount is less than 1 billion rupiah for the small enterprises, and more than Rp 1 billion rupiah for the medium enterprises. In accordance with the amount of assets, an entity will be part of small enterprises if it has assets amounting to less than 20 million rupiah. For the medium enterprises, the assets should be more than 20 Million rupiah, but less than 10 billion rupiah. Land and buildings are excluded from the distinguishing of the SME’s assets. The Ministry of Cooperatives and Small Enterprises provides a similar definition. It states that small enterprises must be owned by Indonesian citizens; and must be not affiliated with other medium or large entities either as branches or subsidiaries, in a direct or indirect relationship. Further, their net assets must be not more than 200 million rupiah excluding land and buildings, or their annual sales must be not more than 1 billion Rupiah per year. Medium enterprises are: entities with assets between 200 million rupiah and 10 million rupiah excluding land and buildings, owned by Indonesian citizens, independent and not affiliated with large enterprises, either branches or subsidiaries, in a direct or indirect ways. The same definition of SMEs in the Ministry of Cooperatives and Small Enterprises is also used by the Indonesian Bank (BI). The Ministry of Industry defines SMEs as entities which have assets less than 600 million Rupiah. The Indonesian Industry and Trade Room (KADIN) categorizes SMEs according to the number of workers, the amount of assets, and the amount of annual sales. SMEs must not have more than 300 workers, the assets are not more than 250 million rupiah, and the annual sales amount should be under 100 million rupiah. Moreover, the Ministry of Trade stated that SMEs are entities which have not more than 25 million Rupiah in capital. The Indonesian Bureau of Statistics determines SMEs from the amount of workers. There should be from 5 to 19 workers for the small enterprises, and 20 to 99 workers for the medium enterprises. Furthermore, the Indonesian General Directorate of Taxation only provides the definition of small entrepreneurs, not the enterprises, in the Value Added Tax Legislation. Vol. 3 N0.1 2007 Jurnal Infestasi 14 The differences in the definitions of SMEs cause a difficulty in setting an appropriate policy for the SMEs. In addition, the SMEs may also be confused as to which regulation they should follow. What happens in Indonesia is that each department has their own objectives, due to its indicator, and they may make different policies and should reach their objectives as well (cite). The uniformity of criteria of SMEs is required to simplify the policy for SMEs. The uniformity may also reflect the coordination within the department and an integrated and comprehensive SMEs policy should be developed. Once the certain definition is made, the policy that will be made should follow. II. THE ROLE OF SMEs IN INDONESIA The SMEs play an important role in economic field of Indonesia. The SMEs occupy 99.95 percent of the total amount of entities in Indonesia. The employment of small enterprises was 89 percent of total employment, while medium enterprises were 10.55 percent in the year of 2000. On the other hand the contribution of the small enterprises for the Gross Domestic Product (GDP) was only 41 percent and the medium enterprises were 16 percent. From the percentage of the employment and the percentage amount of the total entities in Indonesia, it is shown that the SMEs provide employment fields as the unemployment rate in Indonesia is very high. Furthermore, the high percentage of SMEs from the total amount of entities is proof that the SMEs should not be undermined anymore. In contrast, the fact that the SMEs only contribute a low percentage for the GDP should be carefully examined. Because the small amount of the SMEs contribution in the GDP, it does not mean that they should be ignored. The success of the SMEs depends on their productivity in carrying on their business. Productivity is related to the quality of the human resources, something that most SMEs in Indonesia struggle with. Therefore, referring to the huge number of the SMEs in Indonesia and considering the SMEs will give more job opportunities, the improvement of the SMEs in productivity, the government should develop appropriate policies related to the development of the SMEs in Indonesia. The awareness of the government to the SMEs can be seen from the policies they make, and, furthermore, the attention should be integrated from all elements of the government to ensure that the policies do not overlap, or even worse, contradict each other. The Table 2 shows the changing of the SMEs and large enterprises in Indonesia from 1997 to 2002, as reported by the Central Agency for Statistic in 2003. From the table below, small enterprises lead in the number of enterprises in Indonesia, as this sector occupy more than 99% of total enterprises. In 1998, while the huge economic crisis hit Indonesia, the number of small enterprises decreased. However, compared to they experienced a smaller reduction. From 1997 to 1998, the amount of small enterprises decreased 7.4%, while medium enterprises and large enterprises decreased by 14.1% and 12.68%. Respectively as Indonesia started to recover from the crisis, the enterprises started to increase. It is shown in Table 2 that the number of all enterprises increased. The leading position is still occupied by small enterprises, followed by medium enterprises and finally large enterprises. 15 Herwida Jurnal Infestasi Table 2. The Growth of Business Distribution in Indonesia by The Size of Business Entities from 1997 to 2002 Year Small Medium Large Total 1997 39,704,661 60,449 2,097 39,767,207 (99.843) (0.152) (0.005) (100) 1998 36,761689 51,889 1,831 36,815,409 (99.854) (0.141) (0.005) (100) 1999 37,859,509 52,114 1,885 37,913,608 (99.857) (0.138) (0.005) (100) 2000 38,669,355 54,632 1,973 38,725,960 (99.854) (0.141) (0.005) (100) 2001 39,869,505 57,681 2,084 39,929,270 (99.850) (0.145) (0.005) (100) 2002 41,301,263 61,052 2,198 41,364,513 (99.847) (0.148) (0.005) (100) Source: SME Profile in ‘http://www.actetsme.org/indo/indo2000.htm’ (2005) III. THE ASEAN FREE TRADE AREA (AFTA) In January 1992, the Association of South East Asian Nations (ASEAN) declared their new agreement in the trading field called ASEAN Free Trade Area (AFTA). AFTA is a program of regional the trading objective of which is the comprehensive regional tariff reduction. The agreement also includes the liberalization of trading within ASEAN countries. This includes: the agreement in determining product certification standard; simplification the procedure in customs; and the elimination of zero tariff barriers. The first agreement was signed by the original six members of the ASEAN, which are: Malaysia; Thailand; Philippine; Singapore; Brunei Darussalam; and Indonesia. The members of the ASEAN changed as Vietnam entered the organization in 1995, followed by Laos and Myanmar in 1997, and the youngest member Cambodia in 1999. Currently, the ASEAN has Common Effective Preferential Tariff (CEPT) as the tariff for trading transaction within the ASEAN countries. The CEPT was reduced to 0-5% by the year 2002/2003 for the original six members. It will be Vol. 3 N0.1 2007 Jurnal Infestasi 16 reduced by 2006 for Vietnam, 2008 for Laos and Myanmar, and 2010 for Cambodia. As the crisis hit the ASEAN region in 1998, the original six members of the ASEAN agreed to quicken the pace of tariff cuts in one year. The ten members of the ASEAN started to reduce their tariffs for the majority of goods to the range of 0–5% in 2003. Finally the complete commencement of CEPT was planned to be started in 2007 for the original six members of the ASEAN and 2012 for the four new comers. However the trading between them has growth very slow, and the AFTA has not provided many benefits for Indonesia. Under the AFTA and its implementation of tariff reduction and simplification of customs system, all products from the ASEAN region will be more easily to be traded cross the borders of member countries. Further, the investor countries will be more likely to invest in more than one country in the ASEAN region. In 2002, one year before the tariff reduction begun, Indonesia already experienced the negative effects of the AFTA, as the manufacture of ‘Toyota Soluna’ cars moved their assembling company to Thailand, and Indonesia started to import cars from Thailand. The SMEs will also suffer loss from the relocation of some multinational companies from Indonesia to other countries. Because being a sub contractor of a multinational company is one of the methods that the SMEs employ in the business competition in Indonesia. Multinational companies sub contract some parts of their production process to the SMEs, where the business has a relation to the multinational company’s product. For example, a multinational company which produces of shoes will sub contract the making of the shoe soles to the SMEs. Results in employees are losing their jobs and money going out from the country. On the other hand, the competition will significantly increase as all products can are competing each other more easily. The readiness of enterprises in Indonesia is still questionable, in particular is the SMEs. The SMEs, however, are still struggling in their availability of capital, and their problem in preparing the competitive human resources. The government has already issued some policies to encourage the improvement of the SMEs performance. This has involved departments such as: the Ministry of Trade; the Ministry of Cooperative and Small and Medium Enterprises; and the Ministry of Industry. However, the involvement of the Taxation General Directorate has been minimal and it is difficult to find easily the policies in the taxation field which are particular to the SMEs. The discussion about the taxation legislation for the SMEs will be provided in section four. Faisal Basri, an economist, believes that Indonesia has suffered more since the commencement of AFTA, because according to Indonesia’s economic condition, the country has not ready yet for the open market, which also means open competition. Not many of the entities in Indonesia are ready to face the free market as there are weaknesses in management, marketing, productivity, and competitive advantage. Basri believes that Indonesia may survive facing the AFTA if the trading agreement also involves other countries such as China and Japan. The enlargement of trading will give an opportunity to Indonesia to expand its target market. There is a trading agreement between the AFTA and Chinese economic and trade ministers, who already consented to have a Free Trade Area (FTA) in 2010 for the six original members, and 2015 for Vietnam, Myanmar, Laos, and Cambodia. Nevertheless, Indonesia do not have any choice to avoid the commencement of AFTA or resist the global free trade. The Indonesian 17 Herwida Jurnal Infestasi government should take a smart, fast action to face the free trade by giving and applying the appropriate legislation in all aspects of industrial element. The especially important is for the SMEs because Indonesia’s economy heavily relies on the SMEs sector. Taxation may take part on it. Concessions for the SMEs may help the SMEs to minimize their expenses and maximize their profit. Therefore they could continue to carry on their business. Otherwise, Indonesia will only become a target market for other ASEAN countries, and the SMEs in Indonesia will be more likely unstable than in the previous crisis to collapse. IV. THE EXISTING INDONESIAN TAX CONCESSION FOR THE SMEs It is not easy to find the term of ‘SMEs’ in the Indonesian taxation legislation 2000. However we can still find the term “small entrepreneur” and “medium entrepreneur”. But the definition of “small entrepreneur” can only be found in the Indonesian Value Added Tax Legislation No. 18 2000. We can not find term of the “small enterprises” or “medium enterprises” in the Indonesian taxation legislation. The Indonesian Income Tax Legislation No.17 2000 (ITL) As mentioned above, the term of SMEs can not be found in the ITL. Therefore, it is likely that the Income Tax legislation does not provide any legislation particularly for the SMEs. The definition of the SMEs can not be found anywhere in its legislation. However, there are some articles in the ITL that have a relation with the SMEs. This is even though they do not necessarily give many contributions to the concession to the SMEs for income tax purposes. Division III article (3) point (a) (2) The first article is in division III article (3) of the ITL. This concerns the exemption income for income tax purposes. Point (a) (2) states that, the given assets that are obtained by: family who has one degree relationships; religion community; education entities; or social enterprises; or small entrepreneurs including cooperatives that are determined by the Ministry of Finance, as long as they are not associated in the purpose of business, works, or proprietary between those two parties, will be exempted as tax object for the income tax purposes. The article does not mention the SMEs, but, the terms of small entrepreneur and medium entrepreneur may be interpreted as the owner of the SMEs. So, if the small or medium entrepreneur receives assets from the other parties, who do not have any relation to the enterprises, the assets will not be imposed of the income tax. This is beneficial for the SMEs because the SMEs have an opportunity to exercise the assets, in order to enhance their productivity if the assets that are given are worth enough to be used for this purpose. In reality, the activity of giving assets to business entities is very rare, compared to other parties which are mentioned in that article such as entities in religion, education, or social entreprises. Therefore, even though this article is only useful for the SMEs which obtained assets in the way that is stated in this article. Division III article (3) point (k) The second article is an article in the ITL which mentions the SMEs in relation to venture capital. However, the favor of the article is for companies who Vol. 3 N0.1 2007 Jurnal Infestasi 18 have a venture capital with the SMEs. As states in the division III article (3) of the ITL, in regard to the exemption income for the income tax purposes, point (k) states that the income that is acquired by the venture capital company, as the profit allocation from its partner company, which carries on business in Indonesia, is exempted from taxation. The partner companies, which are mentioned in this point are small companies, medium companies or any companies which operate in the business sectors that are determined by the Ministry of Finance. Furthermore, the shares of the partner company are not traded in the stock exchange market in Indonesia. This article, however, does not support the SMEs in regard to income tax purposes. The favor of this article which is given to the venture capital company, aims to support the government policy for the growth of the SMEs, from the availability of capital. This article exists in order to encourage large enterprises to take part in the government program for the SMEs, through the venture capital company. Division III article (14) point (1) and (2) The third article, which probably can be considered as the legislation that has a relation with the SMEs, concerns the taxation calculation method for the individual tax payers, which have a turnover of less than 600 million Rupiah. ITL provides two tax calculation methods for the individual tax payers. This is likely a concession for the SMEs as individual tax payers. The calculation methods are stated in article 16 of the ITL. The first method is book keeping which must be prepared according to the Indonesian Accounting Standard Board (IASB), with some adjustment for taxation purposes. The adjustment can either be the method that must be used for the calculation of: depreciation; inventory; book value of assets; and the allowable expenses which is in article 6(1)(2), 7(1), and 9(1 (c),(d), and (e)). Tax payers whose annual turnover more than 600 million Rupiah, are obliged to calculate their income tax by using this method. The second method is using the norm calculation method, which concerns the taxable income from multiplying the gross income with the norm percentage, which is stated in article 14 of the ITL. This method is allowable for individual tax payers, where turnover is not more than 600 million Rupiah. The norm percentage will be determined in the decree issued by the Ministry of Finance and also stated in the article 15 of the ITL. For the SMEs which carry on the business of the individual tax payers, and which have an annual turnover of less than 600 million Rupiah, may apply to use the data recording method instead of the book keeping method. This does not have a direct impact on the amount of income tax that they should pay, but this method will simplify their works. Especially for the SMEs which do not have competent human resources to comply with the accounting methods, using the data recording method for recording their transactions and calculating the amount of the gross profit will be easier for them. Division VII article 31A point (1) and (2) Article 31A point (1) and (2) state that tax payers who are investing in some particulars business or in some particular regions in Indonesia which are regulated by the decree of The Indonesian government will get some tax incentives as shown below: 1. Reduction of the net income with maximum of 30% from the investing amount. The reduction is for 6 years with allocation of 5% reduction per year 19 Herwida Jurnal Infestasi 2. Acceleration of depreciation and amortization 3. Retain a longer compensation of financial loss but not more than 10 years 4. 10 % tax rate for dividend in regard to article 26 of ITL; for non-resident tax payers; unless tax treaties agreement determines lower tariff. The objective of this article is to enhance the increasing of a direct investment to Indonesia through foreign capital investment or domestic capital investment for some particular business such as: export oriented industry and industry in the rural area of Indonesia in order to achieve the equal distribution of Indonesian development. This article can be used for any possibilities for any agreements with other countries in trading, investment, etc. Indirectly, we could say that this article is mainly for the favor for those who have invested in a big value of money. This article is beneficial for those who invest their money to those which are regulated in the decree of the Indonesian government. The SMEs seem taking an important part in the achievement of equal development distribution in rural area but it is more likely that the SMEs are not included in this article. Income Tax Rates for Annual Assessable Income In the ITL, income tax rates for annual assessable income are divided into three different rates. The first is income tax rates for the resident individual tax payers, which is regulated in article 17(a) of the ITL. The second is tax rates for resident companies and entities, which is stated in article 17(b) of the ITL. The third is tax rates for non-residents either individual or entities, which is in article 26 of the ITL. However, there is no tax rate distinguish for the SMEs tax rate. All tax rates apply to all tax payers, and the distinguishing factor is the level of income which tax payers earn in the current tax year. The Indonesian Value Added Tax legislation (VATL) The VATL more effectively recognizes the term of small entrepreneurs than the ITL even though the term of small enterprises is still very difficult to find. The limitations for small entrepreneurs are for entrepreneurs stated in the decree of the Ministry of Finance No. 552/KMK.04/2000 which was amended by No. 572/KMK.03/2003. The small entrepreneurs are for those who in one income year deliver tax goods or tax services, or either tax good and tax services for which the gross amount of delivery is not more than 600 million rupiah. There will be exempted from the liability of paying and lodging the Value Added Tax (VAT) return. In addition they are not required to register their business as Tax Entrepreneurs. This decree was commenced from 1 January 2004. The deputy of the Ministry of Finance, Mr. I Gde Erata, stated that the commencement of this decree has offered favor of the administration cost efficiency both for the small entrepreneurs and the General Directorate of Taxation. The meaning of administration cost is the cost that arises in purpose of completing the obligation in the value added tax, such as paying, filling and lodging monthly VAT tax return. However, the gross amount for the circumscription of small enterprises which is 600 million rupiah for tax goods and tax services, are too small. This opinion has been reinforced by the Director of Cooperatives Board Wahab As´ary, commenting to the commencement of the decree of the Ministry of Finance No. 572/KMK.03/2003 in January 2004. According to Wahab As’ary, the amount of 600 million rupiah is too small in this current time as there are many small