In an attempt to boost the sluggish domestic economy by persuading Indonesian consumers to spend more, the central government of Indonesia will exempt several products from the luxury goods sales tax. By law, Indonesia has a tax (ranging between 10 and 50 percent) on goods that are categorized as luxury goods. These products include household items such as televisions, electronics, furniture, refrigerators, washing machines, water heaters as well as cars, motorcycles and property.
This luxury goods tax is a remnant from the Suharto period when Indonesia was less developed and the poverty rate higher than today. In those days, items such as the ones listed above were less common to be found in Indonesian households and only the relatively small elite and upper middle class could afford them. Government revenue generated through this tax could be used for poverty eradication.
However, after a prolonged period of robust economic growth, triggering a rapidly expanding middle class, the luxury goods tax has somewhat lost its meaning as many of the products labelled as luxury goods are bought by the lower middle class too.
Indonesian Finance Minister Bambang Brodjonegoro stated last week that the government plans to exempt certain electronics, home appliances and furniture from the luxury goods tax. This revision, which should be implemented before the end of the month, would make the items more affordable to the (low up to high) middle class and elite which, combined, number about 100 million people (and are potential customers).
In the first quarter of 2015, when Indonesia’s economic growth slowed to 4.71 percent (y/y), household consumption accounted for 58.3 percent of total economic growth. This shows the dominating role of household consumption within the economy of Indonesia. However, when we take a look at listed Indonesian retailers’ Q1-2015 corporate earnings reports, then we can conclude that consumption has been relatively weak so far this year. And as it will take some time before government-led infrastructure projects and direct investment will have a multiplier effect in the economy, the government is eager to encourage consumer spending.
Earlier this year the Indonesian government basically scrapped generous subsidies for the highly popular low-octane gasoline. Although this initially did not have a severe negative impact (due to the globe’s low petroleum prices), the recently recovering petroleum prices are now causing accelerated inflation and are limiting people’s purchasing power. By scraping gasoline subsidies, the government saved about USD $21 billion worth of funds to be used for infrastructure development. However, due to bureaucracy only 3.7 percent of the budget for infrastructure development was spent in the January-May 2015 period.
The impact of the tax policy revision (exempting several products from the luxury goods sales tax) may be immediately felt if indeed implemented in June 2015 as consumer spending always peaks in June-July due to the Ramadan and Idul Fitri celebrations (and which bring along inflationary pressure).
Although at first sight the tax revision may seem to cause lower tax income for the government, Finance Minister Brodjonegoro said that it could in fact lead to increased tax revenue as consumption grows. The luxury tax exemption would only imply lost tax income of around IDR 850 billion (USD $65 million) for the government according to the Directorate General of Tax at the Finance Ministry. This is less than one percent of the government’s taxation revenue target in 2015.
Previously, Indonesia’s central bank (Bank Indonesia) had already announced to reduce down payments for home mortgages and car purchases in order to enhance people’s purchasing power and boost consumption. Furthermore, the government may allow foreigners to own luxury apartments (with a value of more than IDR 5 billion) in the bigger cities of Indonesia.