The new law on value-added tax (VAT) and sales tax on luxury goods, which was approved by parliament on Wednesday, by and large achieves those objectives. The new legislation completes the tax reform package launched more than four years ago. The House of Representatives had earlier enacted a new law on general rules and procedures on taxation and on income tax.

The legislation, the third amendment to the 1983 law on VAT and luxury sales tax, will realign the kinds of goods and services exempted from VAT to support the government’s development priorities, but will raise the rate of luxury sales tax to the range of 10 to 200 percent. The highest luxury sales tax at present is 75 percent. The VAT rate will be set in the range of 5 to 15 percent, as against the flat rate of 10 percent now.

Unprocessed minerals, commodities that make up the basic needs of people, food and beverages sold in restaurants and delivered by catering services, currency, gold bar and securities, as well 17 kinds of services, including public transportation, financial and educational services, hotels, hospitals and catering services, will be exempt from VAT.

Even more significantly, the new law will also contribute greatly to a faster pace of bank consolidation by exempting from VAT and luxury sales tax goods transferred in light of mergers and acquisitions.

The central bank has tried various measures, including “strong” persuasion, to prod commercial banks, whose number (125) is still considered too many to facilitate an effective supervision. But the costs of VAT and luxury sales tax on the transfer of taxable goods or assets such as property, vehicles and electronic equipment, have so far been one of the main barriers.

Tax costs have also hindered the government’s plans to consolidate, through mergers or grouping under holding companies, state enterprises operating in the same areas, such as those in the fertilizer, pharmaceuticals, banking, construction and plantations sectors.

The legislation also will spur the growth of Islamic financial markets – sharia-compliant banking services and other financial products – by removing double taxation on Islamic financial products. The tax treatment of Islamic financial products will be in line with that for conventional financial products.

A new mode of transactions such as online purchases, which at present still goes untaxed, will be subject to VAT.

Foreign visitors staying in Indonesia for up to a month will be able to claim, upon their departure, refunds for the VAT and luxury sales tax they paid on goods bought during their visit, as long as the tax to be claimed amounts to a minimum Rp500,000 (US$50).

The government has yet to issue several regulations and ministerial directives on technical details on the most salient provisions of the law before the new law goes into effect sometime next year.

However, the latest amendments to the three laws – regarding general rules and procedures on taxation, income tax and VAT and luxury sales tax, will be able to address the greatest concerns of corporate taxpayers about inefficient and corrupt tax administration and certainty in tax law enforcement.

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