Indonesia Tax Reform Urgency
On October 7 2021, Indonesian parliament passed Tax Harmonization Bill (RUU HPP). The bill which later became constitution is part of government strategy to pursue a tax reform and legal protection for implementing fiscal consolidation agenda.
The urgency for tax reform is clear to increase tax ratio and raising government revenue in order to maintain fiscal health which has been deteriorated by Covid-19 pandemic in the last 1.5 years. Widening budget deficit due to increasing government spending amid tax revenue shortfall could not be maintained for too long in order to keep economic stability (Exhibit 3).
Indonesian government is urged to bring back budget deficit to below -3% GDP in 2023. To achieve constitution’s mandate, government take several actions as reflected in the Tax Harmonization Law. Here we outlined some of key points in the Law which already been approved by the legislative body.
• Income Tax Reform. Government introduced new layer on the personal income tax bracket, where people with annual income of > IDR5bn would be charged a higher tax for 35% from previously 30%. A higher tax for High Net Worth Individuals in the country is set to embody a fair tax policy.
• VAT Rate Hike. After previously became a public debate on whether fiscal authority should increase VAT rates which also include basic needs, education and social services, government decided to keep its exempted from the fiscal reform. The VAT tariff is set to increase from 10% to 11% and will take effect by April 1, 2022. The regulation enacted by government in order to promote the sustainability of economic recovery momentum.
• Corporate Income Tax (CIT). According to the law, CIT tariff cuts from 22% to 20% in 2022 that was previously planned is set to be cancelled. As a consequence, CIT rate to remain at 22% next year.
• Voluntary Disclosure Program for Undeclared Assets. Under this policy, Indonesian government plans promote asset repatriation and increasing fiscal revenue by offering incentives for non-declared assets. The fee rate is set at 6-11% for assets that have not been declared during 2016-17 tax amnesty program and 12-18% for non-declared asset during 2016-20 fiscal year. The lower rate would be applicable if the repatriated assets are invested in government securities and or projects related to downstream and renewable energy.
• Carbon Tax Introduction. Imposing a Carbon Tax indicates government commitment to promote a economic sustainability as well as fostering a less carbon dependent economic activities. Carbon Tax is charged at IDR35/kgCO2e. This new regulation will be introduced to coal fired power plant sector and will be rolled out on April next year.
Tax Reforms in Other Countries
Widening budget deficit and rising indebtedness is not only faced by Indonesia. This constraint also challenges global economy to maintain a prudent fiscal outlook. According to IMF data as of October-21, majority of G20 economies remain running an unprecedented larger budget deficit that was not seen before Covid-19 pandemic (Exhibit 6).
IMF has outlined several strategic steps to implement tax consolidation agenda that promote inclusive growth after the pandemic. IMF recommended several policies to be taken ranging from imposing progressive PIT, taxation of wealth through property tax exploitation and inheritance tax and including VAT reform.
We already observe some ASEAN countries are starting to improve their fiscal outlook despite the downside risk persist. In Thailand, VAT is set to retain at 7% however there will be restructuring on property, e-commerce as well as personal income taxes. While in Singapore, plans to increase GST to 7-9% between 2022-25. All in all, we agree that fiscal consolidation is significantly needed. However the problem lies on the timing. The ambitious tax reforms implementation will be dependent on how quickly governments can reign in the pandemic impact on economies. In addition, a premature fiscal tightening followed by monetary policy tightening would also derail recovery and growth prospect of a fragile economic condition.
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