Associated Press in Dili – For the first time since East Timor broke free from Indonesian occupation last year, wage earners in the territory will have to pay income tax, according to a draft law introduced on Tuesday.

Officials said that part of the extra funds will be used to set up an East Timor Defence Service and to recruit 600 regular soldiers – mainly former freedom fighters – into the fledgeling army.

A bill to introduce the income tax and increase excise rates on luxury goods was being discussed on Tuesday by the National Council, the territory's UN-run government which is administering East Timor during its transition to full independence.

UN finance adviser Michael Francino predicted that the new taxes system would generate an extra US$3 million in the current fiscal year. Some of the revenue raised would be directly injected into East Timor's US$59.4 million 2000-2001 budget.

According to the proposal, the basic income tax rate would start at 10 per cent for those who earned between US$100 and US$650 per month and would rise to 30 per cent above US$650.

The UN estimates more than 75 per cent of East Timorese of working age remain unemployed after retreating Indonesian soldiers and their auxiliaries devastated the territory last year.

The bill would also increase taxes on luxury goods. Alcohol and cars would be the hardest hit items. East Timor's main export crop, coffee, would also be slammed with a five per cent export tax.