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Does less corporate tax make Indonesia better off?
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A building of the Directorate General of Taxation in Jakarta (kontan.co.id/File)
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fter being reduced slightly to 25 percent from 28 percent in 2010, the idea to reduce the corporate tax rate to 17 percent through the proposed revision of the Income Tax Law was raised by President Joko “Jokowi” Widodo in 2016, and then again by Prabowo Subianto, his rival in the April presidential elections.
The blunt reasons behind this idea were to increase competitiveness and draw in foreign investment by simply matching it with Singapore’s corporate tax rate. Although those reasons sound compelling, there are so many interdependent variables that should be taken into account and analyzed carefully before making this significant policy change.
As one of Indonesia’s closest neighbors, it makes sense that Jokowi and Prabowo would want to increase economic competitiveness as Indonesia is below Singapore. In fact, Indonesia is left behind not only economically but in almost all aspects, including global competitiveness, ranking 45th vs. Singapore’s second, life expectancy of 83 versus 70 years old, and foreign investment grade of Aaa vs. Baa2.
Thus corporate tax rates should not be considered as the critical variable to significantly increase competitiveness, even with the assumption that Singapore also has the same tax incentive frameworks.
