Update COVID-19 in Indonesia: 365,240 confirmed infections, 12,617 deaths (19 October 2020)
19 October 2020 (closed)
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Local media in Indonesia report that the Indonesian government has a list of 6,000 names of Indonesians that are ready to repatriate their funds in order to take advantage of the tax incentive provided by the Tax Amnesty Bill. This controversial bill, which is currently being discussed by Indonesia's House of Representatives (DPR), makes it attractive for tax evaders to repatriate their undeclared wealth into Indonesia as they are offered tax incentives and protection from prosecution.
The central government of Indonesia is eager to push for the implementation of this Tax Amnesty Bill as it is expected to bring home between IDR 500 trillion (approx. USD $38 billion) and IDR 1,000 trillion (approx. USD $76 billion) in offshore assets and could increase Indonesia's tax revenue by between IDR 40 trillion and IDR 100 trillion. Higher tax revenue collection is important for the central government because tax revenue accounts for over 70 percent of the IDR 1,822.5 trillion that has been earmarked for state spending in 2016. However, in the first quarter of 2016, Indonesia's tax revenue reached IDR 194 trillion only, down 2.1 percent from tax revenue collected in the same period one year earlier.
Indonesia's tax office targets tax revenue to reach IDR 1,360.2 trillion in full-year 2016. However, analysts say this target is highly unrealistic, particularly given Indonesia's tax revenue collection in 2015 only reached IDR 1,060.9 trillion and it remains unclear what can support the 28 percent (y/y) jump from last year's tax revenue realization given economic growth will not accelerate too markedly.
The central government is therefore eager to reform the country's tax system in order to enhance tax collection and tax compliance. Besides the Tax Amnesty Bill, the government also plans to cut personal income tax and raise non-taxable income by 50 percent, moves aimed at boosting tax compliance and purchasing power (although the higher non-taxable income lead to missed income tax revenue, it is expected to boost household consumption and therefore should lead to higher tax revenue collection from VAT and corporate income tax).
The central bank of Indonesia (Bank Indonesia) estimates that the Tax Amnesty Bill can bring home about IDR 560 trillion in offshore assets and IDR 46 trillion in additional tax revenue. Meanwhile, Indonesian President Joko Widodo asked Indonesia's financial authorities to prepare investment instruments (for example government bonds and mutual funds) to absorb the potentially huge flow of repatriated funds. There are some concerns that Indonesia's banking sector will be plagued by the enormous additional liquidity. The Financial Services Authority (OJK) said there could be an additional USD $42 billion injected into local commercial banks before the year-end due to the repatriation of funds. If this money cannot be distributed into productive assets by the banking sector, then it will lead to a significant increase in the cost of funds as liabilities pile up without returns.
However, if these additional funds can be distributed to the central government's subsidized one million houses program, infrastructure projects, and to the agriculture and maritime sectors it would benefit society as a whole. Moreover, higher liquidity also implies that banks can offer loans at lower lending rates. Indonesia's notoriously high lending rates are partly to blame for sluggish demand for loans. However, loan growth in Indonesia has been slowing in recent years (to single-digit figures), while lending rate stayed the same, signalling falling demand for credit and therefore higher liquidity and lower lending rates may not be able to boost loan demand too much.
Regarding tax incentives, the latest version of the Tax Amnesty Bill states that taxpayers who agree to repatriate their funds are required to pay a tax on their net wealth growth ranging between 1 - 3 percent. Discussions (between the government and the DPR) about the bill will continue into May.