D

espite the potential for a substantial loss of tax income, the government says it will implement a policy to exempt workers with a monthly salary of no more than Rp 2 million (US$218) from income tax.

In the policy, which Manpower and Transmigration Minister Muhaimin Iskandar called, as ‘a gift’ to the country’s workers this International Labor Day, the government will raise the threshold on non-taxable income (PTKP) to Rp 24 million, from the current Rp 15.8 million per year.

Muhaimin admitted ‘the gift’ was aimed at easing planned mass rallies on May 1.

“The government hopes workers will continue working to ensure industry productivity,” he said.

Home Minister Gamawan Fauzi said that although the policy was not yet in effect, “principally it has been approved.”

Gamawan said that the government had never stopped paying attention to labor. “So during May Day no significant issues [will be raised],” he said.

Finance Minister Agus Martowardojo has criticized the plan, saying it could create state losses of Rp 12 trillion annually in foregone tax income.

Agus said that the government needed to calculate the policy’s potential impact on the state budget since subsidized-fuel prices could not be raised despite the fact that global fuel prices remained high.

The Finance Ministry’s fiscal agency interim head, Bambang Brodjonegoro, said on Monday the new policy would boost consumption, eventually yielding higher value-added tax revenues. However, the increase in revenue would not be enough to cover potential losses from the policy, he said,

“Our net tax income will still be lower,” Bambang said.

Separately, University of Indonesia taxation expert Gunadi, has said that the potential loss in income taxes, if the policy was implemented, could be even higher than Rp 12 trillion.

“According to my calculations, if the PTKP is raised from Rp 15.8 million [annually] to Rp 24 million [....] then the potential tax loss could be between Rp 16 trillion and Rp 30 trillion,” Gunadi said.

Despite a potential loss of income tax, Gunadi said that he believed the loss could be compensated by an increase in value added tax.

In response to Agus’ statement, presidential spokesman Julian Aldrin Pasha said that the Finance Ministry had been instrumental in preparing for the implementation of the planned policy.

However, coordinating economic minister Hatta Rajasa said on Monday that if Yudhoyono’s policy was implemented, the state would have many other ways to compensate the potential loss of income tax revenues.

“Although we will lose Rp 12 trillion, we will receive income from various other sources, such as coal mining royalties. The policy will also drive purchasing power, which will trigger the economy due to increased consumption,” Hatta said.

Hatta said that the government would take this policy to the House of Representatives as soon as the legislative body’s recess period had ended.

“I believe the House will approve this policy because it is designed to increase people’s welfare” Hatta said.

The House will reconvene on May 13.