Govt regrets Supreme Court's tax ruling on strategic commodities

The government will now be required to enforce an unpopular Supreme Court ruling that enforces a 10 percent value-added tax (VAT) on certain commodities, according to a senior official in the Trade Ministry.

Deputy Trade Minister Bayu Krisnamurthi said that the government was taken by surprise by the Supreme Court ruling No. 70/2014, which annulled tax exemptions for certain agricultural commodities.

He implied that the ruling was made without the knowledge of the government or industry players affected by it.

"The court asked for input, but if I'm not mistaken, there was no hearing. So when the case dossier was completed, it was immediately decided on," Bayu announced on Friday.

"Frankly, many government institutions were caught off guard when it came out."

A petition was filed with the Supreme Court by the Indonesian Chamber of Commerce and Industry (Kadin) representing players in the crude palm oil industry. The Court granted the petition in the ruling, which annuls several articles from Government Regulation No. 31/2007 concerning tax exemption for exporting certain strategic commodities.

With the Supreme Court ruling, tobacco, cocoa, and coffee farmers will be required to pay a value-added tax of 10 percent.

Bayu said that the tax would severely affect coffee producers, who mostly comprise small-scale farmers. The tax makes the farmers even more vulnerable because coffee prices are quite low, he added.

"What almost certainly will happen is a lowering of the price of crops. This has been common practice in the cocoa bean and coffee industries," Bayu explained.

Furthermore, he said the tax also hurt the government's program to strengthen the country's downstream industry.

On Thursday, several associations representing traders of agricultural, horticultural and forestry commodities came together to form the Primary Commodity Associations Communication Forum (FKAKP). The forum, composed of associations like the Indonesian Coffee Association (AEKI) and the Tea Traders Association, rejected the VAT ruling and aired hopes that discussion on the issue could be opened.

The FKAKP chairman, Irfan Anwar, who also chairs forum member AEKI, requested that the Office of the Coordinating Minister review the tax and its potentially negative impact on crop farmers. "Indonesia is an agrarian country that provides for the livelihoods of 'small' people," he said in a statement made available to The Jakarta Post on Friday.

Previously, Irfan argued that the ruling made producers increasingly reluctant to maintain current levels of production. He feared that the policy would push farmers to begin planting other, more profitable crops. "We reject the implementation of the tax. If farmers revert [to other crops], we'll soon become coffee importers rather than producers," he said.

Irfan also pointed to the negative impact of the VAT on the foreign exchanges generated by the industry. "The tax disrupts cash-flow in the industry and hurts capital spending. It will affect 2 million coffee farmers and decrease the state's forex [foreign exchange] income generated by the coffee industry, which is valued at US$ 1.5 billion a year," Irfan added.

The AEKI sources reveal that coffee exports in 2013 amounted to US$ 1,46 billion from a total volume of 616,943 tons. Total annual production, meanwhile, stood at some 750,000 tons. Exported coffee products include green coffee beans, instant coffee, coffee extracts, concentrates and roasted coffee.