Indonesia's Finance Minister Chatib Basri stated that the government of Indonesia is busy preparing three new policies that aim to restore financial stability as well as attract foreign direct investments. These three new policies involve the higher sales tax on imported luxury cars, a revision of Indonesia's negative investment list, and the higher income tax on imported consumption goods. These three new policies are in addition to the policy package that was introduced by the Indonesian government in August 2013.
The government introduced the August package amid large capital outflows when speculation about the end of the Federal Reserve's quantitative easing program led to global panic and a reversal of the money flow into emerging markets. Emerging markets that are particularly vulnerable to capital outflows are those that show some financial weaknesses, such as a wide current account deficit, high inflation and a sharply depreciating currency. Indonesia recorded an alarming USD $8.4 billion current account deficit in the third quarter of 2013 (equivalent to 3.8 percent of the country's gross domestic product), an inflation rate of 8.37 percent (yoy) in November 2013 and a rupiah exchange rate that depreciated over 20 percent against the US dollar this year (thus being the worst performing currency among the 11 Asian currencies tracked by Bloomberg).
The luxury tax on imported cars, a topic which is currently still in debate between Indonesia's Finance Ministry and the Tax Department, is expected to be raised to 125 percent from the current range of 75-125 percent. This measure is taken to curb the import of foreign-manufactured cars (with an engine capacity of above 3,000 cc), while encouraging domestic production of these cars. In 2012, Indonesia imported around 7,000 luxury cars. Although this is not a large quantity, the high price of the cars (for example Ferraris and Lamborghinis) makes it interesting to increase tax collection while curbing the current account deficit.
The revision of Indonesia's Negative Investment List (Daftar Negatif Investasi) aims to attract increased direct investments from abroad. This list stipulates which sectors of the domestic economy are closed (or partly closed) to foreign investment. Direct foreign investment (FDI) has shown slowing growth in the third quarter of 2013. The government intends to support the inflow of FDIs in order to offset capital outflows from the country's capital markets. Previously it was reported that sectors that will be opened up include telecommunication, financial institutions, pharmaceuticals, tourism, airport and seaport transportation services and management, healthcare, and advertising. In mid-December 2013, the government is expected to release the revision.
Lastly, the income tax on imported consumption goods (excluding food products) will be raised to 7.5 percent. Currently there are two income tax tariffs for Indonesian companies that import goods. Those companies that have received an importer identification number (API, Angka Pengenal Importir) from the Trade Ministry have to pay income tax (over the imported goods) of 2.5 percent, while the income tax for those companies that do not have an API is 7.5 percent. As such, API holders received a tax break. Now, however, the new ministerial regulation will neutralize this difference by setting the tax at 7.5 percent for all importing companies. Thus, the new rule only affects those companies that have an API.
Chatib Basri said that - if all details are clean and clear - these three new policies will be implemented before the end of the year.
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