Now, the economic decline that has accompanied the COVID-19 pandemic has hit Indonesia and other Southeast Asian countries hard, with sectors such as natural resources and tourism particularly affected. The Indonesian economy decreased sharply to 5.32 percent (year-on-year) in the second quarter of 2020 because of the pandemic’s impact. In the third quarter, the negative growth continued, -3.49 percent (year-on-year), with export of goods and services falling -10.8 percent.

The recent Asia Pacific Economic Cooperation Summit supported enhanced “stimulus measures that facilitate economic recovery and job creation” while underscoring “the importance of improving fiscal sustainability and transparency to support long-term resilient growth and future financing needs.” 

Combined with the regulatory reform efforts of the new Job Creation Law, a growth-friendly tax policy is expected to help Indonesia in particular recover more quickly.

A recent series of papers sponsored by the International Tax and Investment Centre offers tax policy guidance on recovery, time-tested fiscal measures that will both generate revenue and foster growth, resolving a perennial paradox. 

Because employment can recover only through growth, a proven path is to implement policies that attract investment, both foreign and domestic. Many governments have already taken bold steps in offering administrative relief and reforming tax administration, offering low-hanging fruit to spur recovery and convenience for taxpayers, such as Indonesia’s delaying corporate tax filing deadlines and speeding up value added tax (VAT) refunds, which helps smooth out negative effects as companies plan a return to growth.

Adding capacity in tax administration pays off quickly. More efficient enforcement of existing legislation in transfer pricing and the effective use of withholding mechanisms can bring in much-needed revenue rapidly and will be important to attract investment as supply chains shift.

Judicious use of excise taxes, easy to administer and low cost to collect, levied gradually, can help raise revenue quickly without harming a country’s overall investment climate, even though they generally account for only about 10 percent of total revenue in many emerging economies. Excise tax systems can simultaneously be made more secure and stable without disrupting legal trade. 

After the 2008-09 financial and revenue crisis, many countries kept their rate of corporate tax relatively low as a growth strategy in a competitive global market; the GDP-weighted average of corporate tax for 94 countries fell to 25.6 percent in 2019, yet revenues remained strong. Estonia is encouraging investment by taxing only profits distribution, not reinvestment.

New hire credits spur employment growth at all levels, with little revenue impact. Accelerated depreciation is tempting to attract quick revenues but can favor hiring skilled over unskilled labor, increasing inequality. To attract high-profit investment, corporate tax rate reductions work better, as does Indonesia’s delay of filing corporate tax returns.

VAT, an important source of revenue to 160 countries, has been hit hard where consumption has declined precipitously. For many low and middle-income countries, a well-functioning VAT is an essential component of both their recovery and their future prospects. For them, tackling VAT now may be the best way to increase revenues without unduly hampering recovery, as it is less distorting and hence less likely to discourage investment and growth.    

For small businesses, where appropriate countries can simplify a VAT by introducing an appropriately high threshold and simplifying registration and filing, and presumptive taxes for smaller SMEs should be considered as an alternative to the cumbersome VAT system. Relatively small and simple policy changes can help taxpayers and governments alike, with little if any adverse effect on revenue, because often 80 percent or more of revenue comes from the largest 10 percent of taxpaying firms. 

Addressing VAT may be politically challenging, but the fiscal situation demands it. Indonesia introduced VAT on digital goods and services as a step toward addressing the VAT “policy gap” of exemptions that distort most VAT systems.

In natural resources, the pandemic has caused a collapse in oil and gas prices and up to a 33 percent cut in capital expenditures globally. Reforming the upstream fiscal regime to promote stability and attract capital is wise. A competitive fiscal regime does not necessarily imply low tax rates but rather a focus on swift payback and recovery of capital spending, taxing profits rather than using revenue-based instruments such as royalty. 

Fortunately, Indonesia had already taken some steps in this direction before the pandemic. Exploration taxes, land tax and some VAT were already removed for the sector in 2016, and sharply reduced the government split in the gross split production sharing contract model with a further bonus at the production stage, in exchange for contractors bearing more initial costs. Now Indonesia must consider whether to add more stimulus for the sector where countries are competing aggressively for investment. 

For Southeast Asian countries, small and medium enterprises (SMEs) remain the backbone of the economy. As the key to recovery for SMEs is cash flow, this should guide fiscal policy to promote employment. Deferring tax payments, flexible payments and waiving penalties for certain hard-hit sectors lowers short-term revenues but rebuilds employment.

The global consulting firm McKinsey believes that Indonesia’s estimated -10.3 percent decline in growth will be less than some of its ASEAN partners. That, combined with the major regulatory reform in business and investment is an opportunity for Indonesia to recover stronger and more quickly.

As the demonstrations over the controversial Job Creation Law showed, few reforms are easy, but throughout the region, governments will be wise to plan now and act quickly, taking steps clearly so that taxpayers know what applies to them.

In line with tax policy, the government has to implement good investment policy, reduce barriers of doing business and develop efficient bureaucracy to support the private sector. The World Bank survey of 190 countries showed Indonesia’s “Ease of Doing Business” improve from 113^rd to 73^rd over the past six years. However, this rank must be continuously improved, because it remains the fifth-lowest among ASEAN countries.

Getting the balance right between economic stimulus and revenue needs will take finesse and, of course, progress in fighting COVID-19. The fiscal effects will likely last longer than the pandemic itself. But governments should remember that growth will itself provide the revenue they need to address the Sustainable Development Goals, in partnership with business. 

While the world cannot know how long the pandemic will last, Indonesia can do more now, building on the Job Creation Law, to prepare for post-pandemic recovery and increase government revenues.  

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Didik Rachbini is the founder/senior economist of the Institute for Development of Economics and Finance (INDEF), Jakarta. Daniel Witt is president of the International Tax and Investment Center (ITIC), Washington, DC.