In the seventh economic stimulus package, the Indonesian government cuts income tax (up to 50 percent) for employees in labor-intensive industries who earn less than IDR 50 million (approx. USD $3,600) per year. This facility, unveiled on Friday (04/12), aims to combat financial pressures on companies caused by the economic slowdown and next year's higher minimum wages (in order to avert a rise in unemployment as companies may feel the need to sack employees). This tax incentive will be offered for a period of two years and - if successful - will be extended.
However, not all companies in labor-intensive industries are able to enjoy this tax incentive. When announcing the 7th economic stimulus package Indonesian Chief Economics Minister Darmin Nasution said it will only be offered to those companies that are export-oriented and employ at least 5,000 people. In this case, the term 'export-oriented' means that at least 50 percent of a company's output is exported.
As such, this tax incentive (effective per 1 January 2016) also aims to improve Indonesia's trade balance and current account balance. The end of the 2000s commodities boom implied that Indonesia's export performance has weakened significantly. Through the recent economic stimulus packages, the Indonesian government aims to reduce Indonesia's dependency on commodity exports, while improving the importance of manufactured exports. Minister Nasution added that ahead of the implementation of the ASEAN Economic Community (AEC) later this year, Indonesian companies will have to face more competition (on a global level) and therefore need to become more innovative and cost-efficient. Given the current sluggish economic conditions and Indonesia's high logistics costs this could mean that companies in labor-intensive industries (such as the footwear and textile industries) feel the need to sack employees.
Meanwhile, the income tax cut for Indonesian workers in labor-intensive industries will also boost purchasing power of the workers. Despite having weakened household consumption remains the main contributor to Indonesia's economic growth, accounting for about 55 percent of total gross domestic product (GDP). However, the impact of this income tax cut is expected to be felt from the later stage of the first quarter in 2016.
Another new policy set in the seventh stimulus package is that the Indonesian government will grant leasehold certificates (for free) to street vendors operating in 34 state-owned designated areas. This program, which will be launched in Banten (West Java) later this month, aims to increase vendors' capital. Currently, Indonesian vendors have difficulty obtaining loans as most vendors are working illegally and lack capital to secure loans. Through this new policy they will have access to government-backed micro-loans.
Economic Stimulus Packages of the Indonesian Government:
|• Boost industrial competitiveness through deregulation
• Curtail red tape
• Enhance law enforcement & business certainty
|• Interest rate tax cuts for exporters
• Speed up investment licensing for investment in industrial estates
• Relaxation import taxes on capital goods in industrial estates & aviation
|• Cut energy tariffs for labor-intensive industries
|• Fixed formula to determine increases in labor wages
• Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
|• Tax incentive for asset revaluation
• Scrap double taxation on real estate investment trusts
• Deregulation in Islamic banking
|• Tax incentives for investment in special economic zones
|• Waive income tax for workers in the nation's labor-intensive industries
• Free lasehold certificates for street vendors operating in 34 state-owned designated areas