A report by the Organization for Economic Cooperation and Development (OECD) on Indonesia’s economy argues that the government has placed too much emphasis on providing fiscal incentives to corporations at a time when more resources are needed to finance social-protection programs.

Speaking at a half-day seminar on the report at the Finance Ministry’s office in Jakarta on Thursday, OECD Secretary-General Angel Gurria said the government should focus on collecting more tax revenue in a bid to finance strategic programs to help alleviate poverty.

“Indonesia’s tax-to-GDP ratio is increasing but is still only 12.6 percent, one of the lowest among the G20 countries,” Gurria said.

Because of the tax incentives, Gurria said that Indonesia’s tax structure was comparable to “a cheese full of holes”. Currently, he said, every company operating in Indonesia wanted to be in the holes, meaning not paying their tax obligations.

To increase the relatively low tax ratio, the OECD report recommends the government removing several tax exemptions, such as tax holidays for specific sectors or investment projects.

“If you create exceptions, exemptions, special treatment; everybody wants to avail themselves of the privileges,” he said.

According to a report from the Investment Coordinating Board (BKPM), a combination of corporate tax incentives implemented since last year has helped foreign direct investment reach a record high in the first six months: Rp 56.1 trillion (US$5.89 billion), up by 30.2 percent from Rp 39.5 trillion in the same period last year.

Gurria explained that foreign companies “will come to Indonesia anyway” even without the implementation of tax holidays and tax incentives as Indonesia currently stood out among other countries in the world due to its robust, stable economic growth.

“Two-hundred-thirty million potential consumers with a growing middle class, a vibrant economy. That’s what brings companies to establish themselves here, not the fact that they are going to have a tax holiday,” said Gurria. “They cannot afford not to be here in Indonesia.”

The other weakness in the state finances, he said, was excessive energy subsidies.

The OECD report estimates that energy subsidies in Indonesia account for nearly 19 percent of government spending in 2012 and this figure could rise to 24 percent next year.

With such a massive subsidy allocation, the Indonesian government is set to face major difficulties in providing the much greater needed social assistance to develop its massive demographic potential and to build sufficient infrastructure.

In the 2013 state budget bill, energy subsidies account for Rp 274.74 trillion. This figure exceeds the government’s planned allocation for infrastructure spending, which only stands at Rp 200 trillion.

Finance Minister Agus Martowardojo said that he appreciated the OECD’s input and the Indonesian government would do its best to improve its fiscal management policies to ensure sustainable and inclusive growth in the future.

Agus said that the Indonesian government would continuously try to maintain a healthy fiscal balance by trying to implement better subsidy management and would be guided by prudence before instituting tax incentives in the future.

The OECD report expects Indonesia’s GDP to grow by 6.2 percent next year, faster than the 6
percent estimated for this year. The faster growth will result in 4.7 percent inflation next year, up from 4.2 percent predicted by the end of this year.

Therefore, the OECD suggests the Indonesian government should tighten monetary policies through various approaches, such as interest rates and liquidity management, to ensure inflation remains on a downward trend while maintaining robust growth.

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