Overview of Revisions to Tax Regulations

The 2015 Revised Budget Draft revealed that the tax revenue target in 2015 was raised to Rp 1.5 quadrillion (US$116 billion). Thus, the government is currently reviewing revisions to some tax regulations to boost the potential revenue from taxes. The property sector is one of the sectors that will be targeted for tax regulation revisions. The government is considering the following revisions to financial transactions involving property.

First off, there are plans to review the reduction of the price limit for income tax (PPh 22) on property. Currently, an income tax of 5 percent is imposed on property transactions connected to both landed houses worth more than Rp 10 billion or more than 500 square meters (sqm) and also apartments worth more than Rp 10 billion or more than 400 sqm. However, the government is considering the possibility of lowering the price limit for the income tax on property from Rp 10 billion to Rp 2 billion. If this revision was approved, the number of people paying taxes on property would increase significantly.

The second revision up for review is the removal of the taxable value of property (NJOP). Currently, regional governments determine the value of land and this measure is used as a guide for collecting property taxes (PBB) and property transfer fees (BPHTB). However, the official value of land usually does not reflect the actual value of a transaction and is typically lower than the actual transaction price.

Therefore, the property tax is typically lower than the actual transaction value. To remedy this inaccuracy, the government plans to replace the current methodology for determining the value of land with a new system called prize zoning. This new methodology should more accurately reflect the actual market or transaction value, thus, increasing the revenue generated from PBB and BPHTB.

The third item on the list of tax regulations to change is the price limit for the luxury tax (PPNBM). The current regulations stipulate a 20 percent luxury tax on transactions for apartments that are more than 150 sqm and landed houses that are more than 350 sqm. Formerly, there was a price limit for the PPNBM. According to a 2004 tax regulation, the PPNBM was imposed on property transactions for apartments above 15 sqm and worth more than Rp 4 million per sqm and also landed house more than 400 sqm and worth more than Rp 4 million per sqm. However, in 2009 the price limit was removed, since it was difficult to determine a nationally applicable price for luxury houses given that prices vary widely across different regions. Developers and property investors received the 2009 revision well because it made it easier to calculate taxes.

Fourth, the government is considering the possibility of removing the PBB. Under current regulations, regional governments collect the PBB once a year. The government may remove the PBB for public welfare; the public will only need to pay the PBB when purchasing property. The PBB may be removed for non-commercial properties such as hospitals, houses of worship and houses below 200 sqm. In this schema, the PBB will only be imposed on commercial buildings such as stores, malls, shopping centers, office buildings and restaurants. This tax exemption is expected to free residents of non-commercial buildings from the burden of taxes. In the future, the government plans to charge property taxes only when people purchase land or a house.

Impact on the Property Sector

If the reduction of the price limit for the income tax was approved, any property purchases that fit the regulations mentioned above (landed houses more than Rp 2 billion and 500 sqm or apartments more than Rp 2 billion and 400 sqm) would be subjected to a total transaction tax of about 40 percent. (This large percentage includes the value added tax of 10 percent, an income tax of 5 percent, a luxury tax of 20 percent and a property transfer fee of 5 percent.) As a result, the price of houses and apartments would increase because developers are likely to pass the tax onto the consumers. The potential increase will probably suppress the demand for residential properties and eventually cause a slowdown in the property sector.

Along with pressures on the demand side, most developers do not target high sales growth for 2015; they are aiming for the same as in 2014. For example, Ciputra Development only targeted Rp 9.6 trillion for marketing sales in 2015 or only 11.2 percent year-on-year (yoy) growth; while Bumi Serpong Damai targeted Rp 7 trillion, marketing sales in 2015 or 7.7 percent yoy growth.

The government'€™s plan to reduce the price limit for income tax to Rp 2 billion will have a diversity of effects across property companies. The reduction will affect developers of luxury properties more than developers that focus on less expensive projects.

The proposed removal of land and building taxes is unlikely to be implemented for residential houses because such taxes are one of the main sources of revenue for regional governments. Furthermore, revenue from the land and building tax comes from taxes on residential houses. For instance, Medan Regional Income Agency said that around 60 percent of their land and building tax comes from residential houses.

As for the implementation of a price limit for luxury taxes, it is rather difficult to generalize luxury houses nationwide. In that line of thinking, the Indonesian Real Estate (REI) is against the implementation of a price limit for luxury taxes, since it is thought to be ineffective.

We expect the government will revise the regulations wisely and will not burden the people so that consumers can continue to support the growth of the property sector.

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The writer is an industry analyst at Bank Mandiri

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