The government announced its seventh economic stimulus package on Dec. 4, aiming to provide incentives for labor-intensive industries, ease certain land-certification processes and to reaffirm the existing investment policy for a three-hour business permit process.

At this stage, the government continues to cut several tax rates, undermining its tax revenue collection target as we head into 2016. The announced tax cuts are:

* Employees who earn up to Rp 50 million (about US$3,570) per annum in companies with more than 5,000 employees and which export at least 50 percent of their sales will be eligible for a 50 percent income tax cut for the next two years, with possible enhancements. This measure is meant to put more money in consumers'€™ pockets, following a previous measure to allow for higher non-taxable income from Rp 24 million to Rp 36 million. However, we feel the impact of this policy action to be minimal, raising annual labor income by just 0.7 percent in 2016 or 1.87 percent in total (together with higher non-taxable income to Rp 36 million).

* For five industries (i.e. shoes, sports shoes, industrial footwear, textiles and garments and leather apparel), there is a new measure to allow for a reduced tax of 5 percent when investing in Indonesia over the next six years. Additionally, the losses carried forward (loss compensation) period is being increased to 10 years from five years. Separately, there is also a reduced dividend tax to 10 percent from 20 percent previously, also being implemented for overseas companies.

The new economic package also simplifies the process for obtaining five-year building permits for street vendors. Street vendors operating on state-owned land can obtain land-use rights to use as collateral for subsidized micro loans (KUR).

This is a positive move, as during periods of downturns and high unemployment, more people join the informal economy. That said, implementation is likely to be difficult as this is the first measure to address these types of businesses.

The above-mentioned measures should help to provide a basis for economic recovery, with tax cuts and allowances becoming major parts of the stimulus. These should help our estimate for GDP growth recovery to 5.1 percent in 2016. However, the latest tax measures are not supportive of tax collection, in our view, as slower economic growth periods typically lead to lower tax revenues.

As of the first 11 months of this year, tax collection amounted to only Rp 806 trillion while customs and excise fees reached just Rp 140 trillion, resulting in tax, customs and excise revenues of Rp 946 trillion (64 percent of government target, 88 percent of the Bahana forecast).

Thus, we expect the 2015 budget deficit to account for 2.7 percent of GDP and remain at the 2.7 percent level in 2016, as we continue to expect a Rp 300 trillion tax shortfall next year. In 2016, we expect growth support to come from stimulus measures instead of government spending.
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The writer is an analyst at PT Bahana Securities.

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