Indonesia sets out tax plan with new income bracket

Indonesia began discussing a tax overhaul proposal with parliament, with plans to increase the valueadded tax, impose a new income bracket and target loss-making firms, while offering potential amnesty.

The general VAT covering most goods and services will be raised to 12%, from 10%, while certain items can carry variable 5% to 25% rates depending on the price, said Finance Minister Sri Mulyani Indrawati on Monday. The government included a tax amnesty program in the draft submitted to the parliament, even if she didn't read the details out during the hearing.

Southeast Asia's largest economy also wants to impose a 35% income tax rate on individuals earning more than 5 billion rupiah ($345,600) a year. A minimum corporate income tax should also be set for firms that report losses for many years by "creative accounting, but can still carry on their business and enjoying facilities from the government," according to the bill.

The VAT structure and new income tax bracket are set to be implemented in January 2022, according to the bill. The government saw its budget deficit swell to over 6% of gross domestic product in 2020 as it embarked on heavy stimulus spending despite weak tax collections. Like many emerging markets, Indonesia is seeking to refill its state coffers as the pandemic looks to have a more protracted impact on the economy, with the daily Covid-19 cases surging to new peaks last week.

"The tax base should be expanded and tax compliance should be improved to increase fiscal capacity," Indrawati said. "We need to continue to reform tax policy and administration so that it is fair between sectors and between income groups, and creates legal certainty, becomes an optimal source of state revenue, and follows best practice."

Indonesia's tax gap the difference between actual and potential collections is around 8.5%, more than double the 3.6% among peer nations, she said. The so-called omnibus law on tax reform aims to bring that shortfall closer to the international benchmark.

There is scope for improvement across various levies, Indrawati said. Indonesia has among the least progressive income tax framework in the region, with the fewest brackets at four, compared to Vietnam and the Philippines' seven and Thailand's eight. Only 1.4% of Indonesian taxpayers paid income tax at the highest 30% rate in the last five years.

Indonesia's current VAT rate at 10% is also lower than the global average of 15.4%, while the tax take is eroded because of too many exemptions, Indrawati said.

Under the VAT reform, previously exempted essentials, like basic goods as well as education and health services, will be subject to VAT under the proposal, though at lower rates. Some VAT exemptions will remain, including: Goods and services that are already subject to local taxes and leviesMoney and gold bullion for the country's foreign exchange reserves and securities General government services that can't be provided by other parties .