A high positioned government official said that the government of Indonesia plans to cut corporate tax gradually from 25 percent currently to below 18 percent in a bid to make Indonesia a more lucrative place to conduct business. Luhut Panjaitan, President Joko Widodo’s Chief of Staff, confirmed that Widodo has already ordered this latest tax move. Over the past few weeks we have seen the announcement of a number of new tax policies as the government aims to boost tax collection by 30 percent in 2015.
With the economy having continued its slowing growth trend in the first quarter of 2015, the Indonesian government is well aware that it needs to spend ‘big-time’ (for example in infrastructure development) in order to reverse the economic slowdown (particularly given the relatively high interest rate environment that has been put in place by Indonesia’s central bank and which is not expected to be cut anytime soon).
Last week, a presidential decree - Government Regulation (PP) No. 18/2015 - became effective that eases tax allowance requirements (involving discounts on companies’ corporate income tax for a specific period) for local and foreign investment. Previously, investors were given a tax allowance if they would invest at least IDR 1 trillion (USD $77 million). Although such a policy implies that the government potentially misses out on tax revenue, it would also lead to enhanced economic activity in the country.
The new decree, however, does not set a clear minimum limit to the size of investment in order to be eligible to obtain a tax allowance. It also does not set other clear minimum requirements such as the number of jobs generated by the investment (to combat Indonesia’s unemployment rate), export requirements (to combat the country’s ailing trade and current account deficits), nor does it set clear requirements regarding the portion of local content in companies’ products. Instead, the new decree stipulates that a local or foreign company that makes a valuable investment, intends to export its manufacturing output, hires a high number of Indonesian workers, or uses a large amount of local content can obtain the allowance. As such, the Indonesian government will evaluate and decide the tax allowance for each individual case.
For 2015, the government targets to attract IDR 519.5 trillion in direct foreign and domestic investment, up 14 percent from last year’s investment realization. By 2019, it targets direct investment to reach IDR 3.5 quadrillion (roughly USD $270 billion).
Although President Widodo targets economic growth of 7 percent by the end of his five-year term, the country’s GDP growth hit a five-year low of 4.71 percent (y/y) in the first quarter of 2015. In the 2015 State Budget the Indonesian government targets 5.7 percent GDP growth in full-year 2015. However, most analysts agree that this figure is much too ambitious. More likely Indonesia’s GDP growth in 2015 will be in the range of 5.0 to 5.2 percent.
Furthermore, Indonesia plans to introduce a tax amnesty in May 2015 in a bid to boost tax revenues for the purpose of increasing government spending. The amnesty is expected to last until the end of 2015 and will allow Indonesian citizens to fulfill their (unpaid) tax obligations (over the past five years) without being given penalties.
Reportedly, Indonesia’s tax-to-GDP ratio was only 10.8 percent in 2014, one of the lowest in Asia. President Widodo wants to raise this figure to 12.7 percent in 2015. However, analysts assume this is unrealistic. In Indonesia only 27 million people - out of an adult population of over 185 million Indonesians - are registered as taxpayer, implying that tax evasion is rampant in Southeast Asia’s largest economy. According to information from the Economic Affairs Ministry, 44 million Indonesians are supposed to pay taxes. For the government tax evasion is a problem as roughly 65 percent of the State Budget mostly comes from corporate and value-added taxes.
For 2015, the government targets to see a 30 percent increase in tax collection. However, given the country’s low tax compliance, made possible by the government’s weak financial management and monitoring as well as low number of tax officials, this is an unrealistic target. Particularly given that the economic slowdown has continued and therefore companies should see lower revenues. Moreover, in the January-April 2015 period, the government collected IDR 310.1 trillion in taxes, equivalent to 24 percent of its full-year 2015 target. This result was slightly down from tax collection in the same period last year.