Indonesian Finance Minister Proposes Cut in Corporate Tax Rate

Indonesian Finance Minister Bambang Brodjonegoro has asked parliament to consider a reduction of the corporate tax rate to 20% from 25% currently and raise the non-taxable income level to IDR54 million (US$4,121) from 36 million ($2,748) currently in  response  to  faltering   tax revenue collection and surging government expenditure.

Both measures, which are intended to spur investment and consumption, will still need to be passed by parliament. The government also wants to revise the banking bill to enable tax office to access bank account information.

Should the measures get passed, the impact is clearly negative for already contracting realized tax revenue, according to Natixis Research in a report.

"We believe that there are more effective ways to spur consumption such as lowering the VAT tax rate or reducing import duties. While this also has a negative impact on tax revenue, it directly increases consumer purchasing power," notes the Natixis report.

"This could not come at a worse time for Indonesia as it faces a widening fiscal gap. The government hopes to pass the Amnesty Bill this month. If this bill does not go through, then the budget will need to be significantly revised to meet the 3% of GDP constitutional limit."

The bill allows taxpayers applying for the amnesty to pay only 2%-5% of their assets as a penalty. Overall, these measures are unlikely to bring meaningful boosts to the state coffer. But even if it is passed, the estimated revenue increase from this will be at most IDR150trn (government high end estimate), about 1% of GDP, according to Natixis.

"The issue with this bill is that it provides one-time boost to the fiscal coffer, reducing the effective tax rate for subsequent years. This means that the revenue estimate will need to be revised and either the fiscal deficit target of 2.2% of GDP or GDP growth of 5.3% will be missed."

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