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Tax policy fueling Asian economic growth
A higher ratio of tax-to-GDP, at least 15 percent for developing economies, should be achieved to promote sustainable economic growth.
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Officers serving a number of taxpayers who do not understand the procedures for filling out the Annual Tax Returns reporting form at the Taxation Directorate General, Sudirman Building, Jakarta, on March 11, 2020. (JP/Dhoni Setiawan)
Asia is coming back strongly after the pandemic, with the Asian Development Bank (ADB) predicting growth of 4.8 percent for each of 2023 and 2024, far above the International Monetary Fund’s (IMF) forecast of 2.8 percent global growth this year. Indonesia will beat these figures, with 5 percent growth expected this year. In fact, Asia is expected to drive fully 70 percent of global growth.
What is driving this boom? China’s reopening gives a strong push to regional demand. But a recent regional forum in Jakarta gave another, perhaps surprising, answer: wise tax policy is underpinning much of the post-pandemic growth. It will be even more important, as Indonesia moves to support the Pillar Two global minimum tax under the Organisation for Economic Co-operation and Development (OECD)/Group of 20 inclusion framework on GloBE (BEPS 2.0). They are expected to implement this new system over the next few years, along with other regional countries including Japan, South Korea, Singapore and Australia.
The 14th Asia-Pacific Tax Forum, cohosted by the Institute for Development of Economics and Finance (INDEF) on May 3-4 in Jakarta, brought together academic experts, public-sector officials and private-sector stakeholders to look closely at how regional and global tax policy drives economic growth.
In his opening remarks, Vice President Ma’ruf Amin attributed Indonesia’s recent success to an “agile” economic policy to boost trade and build economic resilience, and one “willing to take brave measures in challenging times to accelerate economic recovery”. These include efforts to build Indonesia’s downstream capacity to make higher value-added products and major infrastructure investments that spur further growth.
Indonesia has performed well. Tax revenue in 2022 reached Rp 1,716.8 trillion (US$120 billion), 15.6 percent higher than the revenue target. The figure exceeds the 2021 mark of Rp 1,547.8 trillion, which was 7.8 percent above the target. These data show that Indonesia had achieved a new record of tax revenue growth during the past decade – it grew by 34.3 percent in 2022 year-on-year.
Higher oil and gas prices helped, but fundamental economic policies, which the Vice President called “brave measures in challenging times”, continue to drive strong revenue growth that led to a surplus of Rp 128.5 trillion in the first quarter of 2023. As revenue increases, Indonesia’s 2022 Tax Harmonization Law and the regulations implementing it are an important step forward – and tax compliance is expected to rise as tax administration increasingly moves to digital solutions.
