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Cut in tax rate to benefit banks most
Starting in 2009, the government and the parliament have agreed to lower Indonesia's personal income tax upper-bracket from 35 percent to 30 percent This is being implemented to create a more competitive tax rate compared to regional peers
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Starting in 2009, the government and the parliament have agreed to lower Indonesia's personal income tax upper-bracket from 35 percent to 30 percent This is being implemented to create a more competitive tax rate compared to regional peers.
It is worth pointing out that Indonesia's maximum tax bracket is now lower than both Thailand and the Philippines. Nonetheless, the Indonesian tax committee has stated that the personal income tax upper-bracket could fall still further to the 25 percent level in the future.
The new tax ruling has raised the maximum tax bracket to those with incomes of more than Rp 500 million (US$45,500) per annum from Rp 250 million previously. The next bracket (Rp 250 - Rp 500 million) will be taxed at 25 percent, followed by 15 percent for those in the Rp 50 - Rp 250 million bracket.
Those making below Rp 50 million will be taxed at 5 percent with the first Rp 15 million not taxable. Thus, the new tax ruling benefits companies which are paying their employees at higher levels. In fact, individuals paid below Rp 25 million per annum will not benefit from this new ruling.
Additionally, most individuals do not benefit from this new tax ruling as most employees are paid on a "net" or "take home" basis, allowing firms rather than individuals to benefit from the new lower tax structure. In Indonesia, only foreign companies like Unilever (less than 10 percent of total companies) would have the propensity to pay their employees on a "gross" basis.
In such a case, we estimate that the average Unilever employee, paid at Rp 10 million or $900 per month, would pay around 20 percent less to the tax office, amounting to Rp 270,000.
However, for manufacturers who pay on a "net" basis, the amount of benefit is minimal based on our study. With salaries only accounting for around 5 to 6 percent of COGS for producers, the amount of tax savings will be minimal at less than 1 percent higher net profit.
On the plantation side, at first glance we would expect this labor intensive sector to benefit from the new personal income tax structure.
Out of the five listed CPO plays, we estimate that employee costs account for around 40 percent of COGS in 2009, up from 30 percent in 2008 as other costs such as fertilizer fall. However, with average salary per company at slightly less than Rp 1.5 million per month or below Rp 18 million, we find that plantation firms in general do not benefit from the lower personal income tax rate due to its high low-labor content.
So who would be the main beneficiary? Our study shows the average salary at the five banks under our coverage amounts to Rp 156 million per annum (inclusive of bonus). This makes the banking sector the clear winner from this new ruling.
With salaries on average accounting for 52 percent of total operating costs, the average Indonesian bank will experience 6.7 percent improvement in its bottom line growth. Based on our study, Bank Negara Indonesia sees the biggest benefit with 13.8 percent higher net profit growth; however, this is mainly due to its low net profit base.
The next biggest beneficiary is Bank Rakyat Indonesia, which we expect to experience 6.8 percent higher 2009 earnings growth due to its micro financing focus.
The writer is the senior vice president and head of research at Bahana Securities.
