Indonesia Finance Minister unveils plans for major tax overhaul

JAKARTA - Indonesia’s finance minister on Monday (June 28) presented a government proposal for overhauling tax regulations that would introduce a carbon tax, a higher VAT rate and a programme to report undisclosed assets.

Sri Mulyani Indrawati told a meeting with parliament’s finance commission the measures were aimed at boosting government revenue that have dropped in Southeast Asia’s biggest economy due to the coronavirus pandemic.

However, some analysts warned implementation could be challenging, with the economy still reeling from the pandemic.

“Even though we are discussing this during the Covid pandemic, it does not divert our attention from the medium-, long-term need to build a fair, healthy, effective and accountable tax system,” Sri Mulyani said, promising implementation will take into account economic recovery.

The minister proposed increasing the base value added tax (VAT) rate to 12 per cent from 10 per cent currently, applying a 5 per cent-25 per cent rate range for some goods and services, and removing most exemptions. To limit the impact on the poor, she proposed more subsidies.

An income tax rate of 35 per cent was floated for people earning at least 5 billion rupiah (S$463,000) annually. Indonesia now applies 5 per cent to 30 per cent personal income tax.

She also proposed a new carbon tax of 75 rupiah ($0.0052) per kg of CO2 equivalent and an excise tax for all plastic products.

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“While tax reform is needed, the main issue is timing,” said Faisal Rachman, an economist at Bank Mandiri, pointing to a recent flare-up in coronavirus cases and noting how mistiming the changes could hurt investment.

However, Moekti Prasetiani Soejachmoen, chief economist at Danareksa, said the bill should be debated now to allow it to come into force by the end of 2022 to help meet a target of lowering the budget deficit below 3 per cent of GDP in 2023.

Meanwhile, central bank governor Perry Warjiyo told a briefing he was “not worried” about the tax measures pressuring inflation, which he expected to stay low until early next year.

Sri Mulyani also unveiled a programme to allow people to report undisclosed assets following Indonesia’s previous tax amnesty in 2016 to 2017.

According to a copy of the draft bill provided by a lawmaker, the government aims to give taxpayers another chance to declare hidden assets by charging a rate of between 12.5 per cent to 30 per cent of the asset values.

The minister also proposed an “alternative minimum tax” for loss-making businesses still operating, a chance to settle tax crimes with fines, and a revision so that other parties such as electronic transaction providers can collect taxes for the government.

Parliamentary debate for a bill typically takes months to conclude.