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Jakarta Post

Tax incentives spree

  • Editorial Board

    The Jakarta Post

Jakarta   /   Mon, February 17, 2020   /   09:05 am
Tax incentives spree Finance Minister Sri Mulyani Indrawati gives a speech at the Mandiri Investment Forum 2020 in Jakarta, Wednesday. (JP/Dhoni Setiawan )

The omnibus bill on taxation that the government has submitted to the House of Representatives will offer a wide range of tax incentives (rebates and exemptions) and simplify tax-payment procedures, all designed to make it much easier to do business, thereby reinvigorating investment in the country.

Like most other reforms, the new fiscal policy will cause short-term pain as the tax rebates and exemptions would immediately cut tax receipts. But the new tax measure is badly needed for the long-term good of the economy. This structural reform not only will boost investment but also enable the government to increase its tax-collection capacity that is now estimated at only 50 percent of the total tax potential.

Read also: Government to liberalize investment in omnibus bill on job creation

Finance Minister Sri Mulyani Indrawati has admitted that the tax incentives offered through the omnibus bill on taxation would cut government tax revenues by about Rp 80 trillion (US$6 billion) this year. This does not yet include the potential impact of the coronavirus on our economy, given our heavy dependence on China’s economy. Even though the economy last year did not do as badly as predicted, government tax revenues were still 14 percent short of the target.

Indonesia has long been notorious for extensive tax evasion, as the government revenue-to-gross domestic product (GDP) ratio is low, at just 12 percent, compared with an emerging economy average of 27.8 percent, and tax collections are lower than both regional peers and countries with similar levels of GDP per capita.

The planned cut in the corporate income tax rate from 25 percent to 22 percent in 2021-2022 and to 20 percent in 2023 will make the country more competitive with other countries in the region, attracting investment. The tax exemption given to dividend incomes from domestic and foreign sources that are invested within the country, is designed to stimulate investment.

The tax cut and simplified tax-payment procedures are expected to significantly broaden the tax base, including taxes on digital-economic activities, as the degree of voluntary tax compliance will increase and investment activities thrive. Taxpayers have long complained about onerous business processes for registration, filing and payment, including the auditing process for value added tax refunds.

Read also: Indonesia plans sweeping tax reforms for 'expatriate' income, dividends, penalties

However, these policy reforms will also require significant investments in tax administration capacity and significant investment in information technology and human resource development. Especially disappointing is the poor capacity of the tax authorities to collect personal income tax that averages just about 1.1 percent of GDP. This is further evidence of huge tax evasion in the country, given the large number of rich families.

We expect the deliberations on the omnibus bill on taxation will run much more smoothly and faster than the bill on job creation because the political process will involve only about three commissions within the House.

We retain reservations, however, on how fast the government will complete the many presidential regulations and ministerial decrees to implement the law. Past experiences have shown many provisions of laws remain unenforced due to the absence of implementing regulations.