The Industry Ministry proposed a fiscal incentive to encourage the recycling industry by reducing value-added tax (VAT) by 5 percent. The government also hopes to ensure sustainable availability of natural resources and increase the economic value of waste.
However, a fiscal incentive scheme to support sustainable development that raises the concept of 3P -- people, profit and planet -- will be ineffective if done partially through VAT incentives for the waste processing industry. In line with the circular economy concept, China and Thailand are among countries which have implemented the extended producer responsibility (EPR) concept, which designs a holistic system of waste management by combining various financial responsibilities and incentives.
According to Statistics Indonesia (BPS), consumption patterns in Indonesia have shifted from goods-based to experience-based consumption. This is in line with the increase in per capita income from Rp 38 million (US$ 2,688) per year in 2013 to Rp 52 million per year in 2017. Thus consumer behavior will not be easily influenced by price factors.
Meanwhile based on an independent survey in 2017, the decline in the price of goods for recycled production will not divert demand for them, given the influence on trends such as that inspired by social media. Consumer behavior research in China has proven people are willing to pay more for recycled products, given several factors that influence consumer choice such as functional values, social and emotional values.
Regarding the above incentives, the lower the VAT rate due to the incentives, the more competitive the goods are. However, the indirect VAT tax scheme will not increase profits instantly without increase in sales volume. This is because the VAT will only be added to the selling price as the output tax and will later be credited with input tax. This is different from the tax credit scheme which can directly affect profit.
At the end of 2018, only 360 industries were involved in plastic recycling according to the Indonesian Plastic Recycling Association (ADUPI). In fact, the amount of plastic waste in Indonesia is the second highest waste after organic waste, around 14 percent. Meanwhile, the recycling industry can only meet 1.1 million tons of the needs of plastic in Indonesia so we have to import plastic. Without incentives such as ease of doing business, business development services and ease of obtaining loans, the recycling industry will not be able to develop. Thus, VAT incentives will only be enjoyed by a small portion of the industry without substantially attracting the private sector to enter the recycling industry.
Indonesia has actually regulated waste management system in Law Number 18/2008. However, these provisions are still too normative regarding rights and obligations. One article indeed states the government will provide incentives and disincentives, but in practice these are non-fiscal incentives, such as awards.
There are several solutions to deal with this problem. Several countries that first applied a waste treatment system by providing fiscal incentives and integrated subsidies such as China, Thailand, and Germany can be used as a reference to be implemented in Indonesia.
First, the EPR scheme implemented in China and Thailand involved various parties through a combination of incentives and disincentives. Companies that produced non-biodegradable goods will be subject to taxes. Meanwhile, for the use of waste as raw materials, the company will be given incentives in the form of tax credit. Consumers who submit recyclable waste to collectors are given subsidies in the form of cash. Meanwhile, the recycling industry itself is also given an incentive in the form of reducing income taxes which directly affect profits.
Secondly, Indonesia can adopt the green dot scheme implemented in Germany by imposing tax packages. The imposition of packaging rates is based on the type of material and volume of packaging. This will indirectly educate companies to use packaging that is easy to recycle, reuse, and reduce. Through this scheme companies must manage their packaging waste to reduce taxes.
Third, the eco-cash scheme implemented in Indonesia is still carried out by individuals, for example, a garbage insurance initiative by the physician Gamal Albinsaid or the idea of a garbage bank in Malang. There is no national policy that regulates eco-cash schemes in an integrative way to enable national scale application. In addition, discretionary fiscal incentives such as subsidies have not touched this area.
Fourth, the government can raise public awareness of green behavior. The government and the private sector can together create business development programs for the recycling industry.
In the end, providing incentives for the recycling industry without a comprehensive green policy scheme and the support of all parties including the private sector will not be effective in creating sustainable development; it would just create loss of tax revenue without giving impact to the environment.
The writer is an employee of public relations at the Directorate General of Taxes at the Finance Ministry. The above views are personal.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.