Cutting Taxes


Economic News

22 Jul 2010
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The House of Representatives endorsed last week a new set of tax laws that is expected to encourage investment in Indonesia as well as benefit the individual taxpayer.

The new corporate income tax will be based on a two-tiered system, in which any company earning more than $5.3m a year will pay a rate of 28%. This will replace the existing progressive system, which can reach as high as 35% for top-earning companies. The rate is set to be further reduced to 25% in 2010.

While the move away from a progressive system will certainly benefit those corporations within the highest-earning bracket, those at the lower end of the spectrum also stand to gain. Under the new two-tiered system, any company that is categorised as a "micro enterprise", with earnings of less than $5.3m per year, will see their tax rate for 2009 reduced to 14%, then further to 12.5% in 2010.

Businesses are praising the announcement as a move that will encourage investment, and hail it as a major step towards what they hope will be a continuous transition to a more business-friendly fiscal climate.

Ray Headifen, technical advisor for taxation services at PricewaterhouseCoopers Indonesia, told OBG, "The enactment of the new tax law has been well received by the business community. The reduction in the corporate puts Indonesia on a competitive footing with is neighbours. This combined with the investment incentives introduced last year will hopefully bring renewed investment activity to Indonesia."

South Korea, Singapore, Hong Kong and Malaysia have all lowered their corporate tax rates over the past two years. Following the trend, Indonesia's new maximum rate of 28% will place it more on par with its main South-east Asian competitors, as maximum corporate tax rates for Singapore currently stand at 19%, Thailand 25%, Vietnam 24% and Malaysia 25%.

Indonesia's capital markets are also expected to benefit. Under the new laws, any company that floats at least 40% of its shares will benefit from a further 5% tax cut. This is intended to increase the number of listings on the Jakarta Stock Exchange, as there were only 322 actively traded stocks in Indonesia by the end of 2007, a figure considered quite minimal for South-east Asia's largest economy. Malaysia, in comparison, has over 1000 listed companies, while Singapore has over 700.

Halim Susanto, president commissioner of local investment firm Nusadana Capital, told OBG, "The decision is timely, as incentives need to be provided to encourage more companies to go public."

Starting next year, individual taxpayers will also be able to hold onto more of their money. Those in the top income bracket will see the ceiling rate on income tax slashed from 35% to 30%, while for those in the lower income bracket, the taxable income threshold will be raised from $1,375 to $1,650. It is hoped that this move will help ease the burden of rising food costs on the country's poorest families, who are already estimated to spend nearly 70% of their incomes on food products, according to government statistics. Dividend taxes, meanwhile, will be halved from 20% to 10%.

Additionally, the general population is going to benefit from the waiving of a $104 exit tax currently imposed on all Indonesian citizens whenever they fly out of the country. This should provide a boost to the airlines and travel industry.

Royanto Handaya, director of Panorama Leisure, a leading Indonesian tour operator, told OBG, "At present, anyone can fly from Jakarta to Singapore for as little as $100. With the exit visa costing the same as the actual flight itself, this acts as a big deterrent for Indonesians wanting to go on short trips. When you factor in the exit tax removal with the fact that more and more Indonesians can now afford to travel, I see huge overall potential for the growth of outbound travel."

While the reduction in tax generation from multiple sources will result in losses to state revenue in the immediate term, most analysts believe that the overall effect on tax revenues will be positive in the long run. The government estimates that there will be a short-term tax loss of $4.4b in 2009 as a consequence of the new laws. However, the losses are expected to even out within two years, as the measures will serve to lift Indonesia's poor tax-compliance rates. Only 6m out of a population of 235m currently pay taxes, according to government figures.

"More than 30% of eligible Indonesians are not paying taxes, and tax collection needs to improve so that the government has more money to spend on critical social and infrastructure needs," Erwin Aksa, chairman of the Indonesian Young Entrepreneurs Association (HIPMI), told OBG.

The new laws include a host of measures to encourage tax registration, including an amnesty for those who register promptly and costly penalties for those who do not. A spokesperson for the House of Representatives stated that, while the new law is set to support businesses, the government will be "stiff on any violations."

On their part, authorities have indicated that through increased compliance rates and a boost in investment, the new tax laws should actually increase the overall tax base after a two-year period.

"So long as companies and individuals believe the tax rate is reasonable, they will reach a point where they are comfortable paying the tax and not endeavour to seek ways of reducing or eliminating the tax," Headifen told OBG.

While many believe that Indonesia, ranked 129th out of 181 countries in the World Bank's most recent survey on the "ease of doing business", still has many issues to address to make the country more attractive to investors, the lowering of the corporate tax rates is being viewed as a major step in the right direction.

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