Interview: Sri Mulyani

Where have recent tax reforms improved the business and investment climate, and what further measures can increase the tax-to-GDP ratio?

SRI MULYANI: We must consider both tax policy changes and tax administration reforms. On the policy side, tax incentives are given to businesses to support their expansion and encourage new investment, particularly in strategic sectors that support economic development. For example, tax incentives in the manufacturing sector help to encourage export growth.

On the administration side, the implementation of the Omnibus Tax Law will have a direct impact on tax revenue collection in Indonesia. In the short term, the tax-to-GDP ratio may decline, but it will slowly rise as a result of tariff changes and adjustments to tax brackets. In order to compensate for the initial tax loss, Indonesia will increase its focus on ensuring tax compliance. In addition, we will continue to enhance the core tax system so that it can be implemented in full within the next few years. This core tax system is expected to be an effective tool to improve the profiling, monitoring and analysing of tax databases so that the tax administration process can be faster and more efficient.

In what ways can the government boost foreign investment while also safeguarding domestic industries and preventing resource exploitation?

MULYANI: Our key aims to ensure that Indonesia is an attractive destination for foreign investment include easing licensing for foreign enterprises, improving the process of land acquisition, ensuring the availability of basic infrastructure, and implementing a clear and prudent tax law. Tax incentives are another way to catch the attention of foreign players looking to enter a new market and encourage investment. However, it is important to ensure that existing players are not harmed when formulating tax incentive policies, as this would result in zero benefits for the economy. The design should give both existing companies and newcomers an equal opportunity to access incentives. Additionally, new investments should be directed to priority sectors with high added value. In order to facilitate investment, the government provides protection including import duty tariffs, investment safeguarding measures, anti-dumping duties, and exemption from import duties on machinery and raw materials. Tax holidays for investment in renewables could be another incentive to attract investment in a key segment.

How can Indonesia move from a middle-income to a high-income country in the next decade?

MULYANI: To escape the middle-income trap, we must tackle issues not only on the demand side but also on the supply side. Transitioning to productivity-driven growth requires a flexible labour force, sound financial markets and competitive industries. Measures to address this include upskilling human resources, attracting investment and developing innovative digital systems to streamline bureaucratic processes.

To what extent can infrastructure development encourage inclusive economic growth?

MULYANI: It is vital that there is adequate infrastructure across the archipelago in order to boost the national economy. In 2020 the government allocated Rp423.3trn ($29.8bn) to infrastructure development, with targets including building 18,758 km of bridges, irrigating 198.79 sq km of land and laying 238.8 km of railroads. Allocating funding directly to regional governments helps to accelerate these objectives. In 2020, Rp200.3trn ($14.1bn), or 47.3% of the infrastructure budget, was transferred to subnational authorities.

Government financing schemes support the public and private sectors on both the national and regional level through viability gap funds, availability payments, project development facilities and guarantees. The government also provides financing for state-owned enterprises involved in infrastructure development.