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Govt warned over aggressive tax rate cut proposal
Indonesia will need to offer more than tax incentives in order to propel competitiveness with its peers in ASEAN, especially if it wants to compete with renowned business and financial hub Singapore, experts and industry players suggest
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Indonesia will need to offer more than tax incentives in order to propel competitiveness with its peers in ASEAN, especially if it wants to compete with renowned business and financial hub Singapore, experts and industry players suggest.
President Joko “Jokowi” Widodo recently said that it would be possible for the government to bring down corporate income taxes from the current 25 percent to 20 percent, before finally reaching a 17 percent rate.
The neighboring Singapore, which is widely known as being one of the safe haven countries for wealthy Indonesians, applies a 17 percent corporate income tax rate.
Indonesia’s tax cut, however, is not likely to have a significant effect on investment, said Ernst & Young Solutions international tax services partner Chester Wee.
“Singapore continues to be a choice location for multinationals for high value-added activities such as headquarters activities, research and development, centralized logistics management and procurement activities and high-tech manufacturing,” he said as quoted by The Straits Times.
OCBC Bank’s head of treasury research and strategy Selena Ling expressed a similar view, saying the two countries’ manufacturing profiles and competitive edges were very different.
Overall, she added, the attractiveness of a location for foreign direct investment had to be holistic and tax was just one of the factors for consideration.
Indonesian Chamber of Commerce and Industry (Kadin) chairman Rosan P. Roeslani admitted that Singapore would remain attractive given the fact that it topped the World Bank’s Doing Business report, unlike Indonesia.
Indonesia ranked 109th in 2016 and 120th in 2015 among the 189 economies surveyed in the report.
“That’s why Pak Jokowi pays attention to [Indonesia’s] ease of doing business rank,” he said Friday.
The government has scrapped more than 3,000 regional government regulations (Perda) to make it easier for businesses to set up and operate so that the country can rank 40th in the 2017 report.
In the current competitive era, a country will be left behind by investors if it refuses to compete, said Bank Central Asia (BCA) economist David Sumual. The corporate income tax rate cut should be followed by improvements in the business climate as well as in taxation law enforcement and tax reform.
“The business climate must be improved because we can lose in the tariff battle,” he said.
The government plans to revise laws concerning general taxation, income tax and value-added tax to support the implementation of the newly passed Tax Amnesty Law. It has proposed to the House of Representatives a revised draft of the General Taxation Law only.
Finance Minister Sri Mulyani Indrawati said the government would carry out further assessment on the proposed tax rate cut.
Separately, businesspeople warmly welcomed the plan.
Indonesian Employers Association (Apindo) chairman Hariyadi B. Sukamdani stated that the lower corporate income taxes would help ease companies’ cost burdens amid the economic situation, which remained unfavorable for businesses.
Indonesia’s economy grew by 4.8 percent last year, the slowest in six years. It expanded by 5.04 percent in this year’s first six months, although the government full year target was 5.2 percent.
Lower corporate income taxes would add value to the country in addition to its large market and natural resources, said Indonesian Food and Beverages Association (Gapmmi) chairman Adhi S. Lukman.
Despite its positive effect to boost the country’s competitiveness, the government should be cautious over the proposed policy’s downside risks.
Samuel Assets Management economist Lana Soelistianingsih calculated that the cut would cost the government about Rp 80 trillion in potential losses to its tax revenues.
“Now the question is, can this loss be restituted in the following years?” she asked.
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