New in­cen­tives aimed at spurring growth in In­done­sia


In­done­sian Fi­nance Min­is­ter Bam­bang Brod­jone­goro has tin­kered with fis­cal pol­icy as he re­laxed the re­quire­ments for cor­po­rate tax al­lowances and eased luxury taxes on cer­tain items to pump fresh blood into the slug­gish econ­omy that is ex­pand­ing at a six-year low.

Ef­fec­tive next week, the tax breaks will be for com­pa­nies with large in­vest­ments, sig­nif­i­cant con­tri­bu­tions to ex­ports, am­pli­fied job cre­ation or high lo­cal con­tent, ac­cord­ing to Bam­bang.

The In­done­sian fi­nance min­istry will re­ceive rec­om­men­da­tions from re­lated min­istries, such as the in­dus­try min­istry, be­fore re­leas­ing a new reg­u­la­tion in the com­ing days, he said. “This is part of our struc­tural re­form as we want to shift from con­sump­tion-driven to in­vest­men­tled growth,” Bam­bang said.

“You have seen the suc­cess story of China. How could the coun­try re- cord dou­ble-digit growth rates in the past few years? Be­cause in­vest­ments play a huge role in the econ­omy.”

Bam­bang ex­pressed hopes that there would be more com­pa­nies uti­liz­ing the gov­ern­ment’s tax al­lowance fa­cil­ity, with fi­nance min­istry data show­ing that there were cur­rently 143 com­pa­nies al­ready en­joy­ing the fa­cil­ity.

Large Con­tri­bu­tions, Am­pli­fied

Job Cre­ation Key Cri­te­ria

Mean­while, com­pa­nies rein­vest­ing their earn­ings in In­done­sia would also be el­i­gi­ble for var­i­ous fis­cal in­cen­tives, in­clud­ing loss com­pen­sa­tion from the gov­ern­ment, to pre­vent cycli­cal earn­ings repa­tri­a­tion that has put pres­sure on the ru­piah.

The econ­omy has re­lied heav­ily on house­hold con­sump­tion, which ac­counts for 55 per­cent of gross do­mes­tic prod­uct (GDP). In­vest­ments are 30 per­cent of GDP, with the rest com­ing from net ex­ports and gov­ern­ment spend­ing.

In the first quar­ter this year, eco­nomic growth fell to 4.7 per­cent, the low­est in six years, pos­ing a chal­lenge for Pres­i­dent Joko “Jokowi” Wi­dodo, who promised to vot­ers that he would spur growth to 7 per­cent in three years. Econ­o­mists have also warned that fur­ther slow­down might be in the cards.

Pur­chas­ing Man­agers’ In­dex (PMI), an in­di­ca­tor of pro­duc­tion and out­put fore­casts among in­dus­tries, has fallen to a record low of 46.4 in March, with the in­dex al­ready held be­low the neu­tral level of 50 in all five months this year.

Mean­while, Busi­ness Ten­dency In­dex (ITB), an in­di­ca­tor of op­ti­mism in the econ­omy, fell to 96.3 per­cent in the first quar­ter, com­pared to 104 in the fourth quar­ter last year, ac­cord­ing to the Cen­tral Statis­tics Agency (BPS).

As a short-term mea­sure to spur growth, Bam­bang said that he would scrap luxury goods tax, as a bid to en­cour­age more In­done­sians to spend their money do­mes­ti­cally.

The gov­ern­ment will slash or ex­empt the luxury tax slapped on branded items, such as those pro­duced by Gucci, Louis Vuit­ton and Her­mes, to en­cour­age wealthy In­done­sians to shop at home in­stead of over­seas. “In­done­sian women have been buy­ing LV (Louis Vuit­ton) bags in Sin­ga­pore be­cause they are cheaper there due to the im­po­si­tion of the luxury goods tax in In­done­sia,” Bam­bang said. “Now they don’t have to go over­seas to buy such branded goods.” Bam­bang also said that a low tax on luxury items would also draw for­eign tourists to In­done­sia.

Be­gin­ning next week, luxury goods taxes would only ap­ply for su­per-ex­pen­sive items such as yachts and pri­vate jets, as well as for high-end apart­ments and houses. Mean­while, elec­tronic goods such as cam­eras, mu­sic play­ers, tele­vi­sions and air con­di­tion­ers would no longer be clas­si­fied as luxury goods, and thus would be ex­empted from the taxes that pre­vi­ously ranged from 10 per­cent to 40 per­cent.

To shield the coun­try from an in­flux of im­ported branded goods, the pol­icy would be ac­com­pa­nied by an in­crease of in­come tax for im­ported goods (PPh 22) to 10 per­cent from the ex­ist­ing 7.5 per­cent, ac­cord­ing to Bam­bang.

Sigit Pri­adi Pra­mu­dito, the Fi­nance Min­istry’s direc­tor gen­eral for taxes, es­ti­mated that the coun­try could lose around 900 bil­lion ru­piah (US$67.6 mil­lion) of an­nual tax rev­enues be­cause of the im­ple­men­ta­tion of this pol­icy. But the long-run im­pact would be rel­a­tively min­i­mal, as the loss would be com­pen­sated by higher con­sump­tion, thus even­tu­ally con­tribut­ing to higher tax rev­enues, Sigit ar­gued.

The pol­icy would also pre­vent the smug­gling of luxury goods from over­seas, thus con­tribut­ing to a bet­ter tax re­port­ing sys­tem do­mes­ti­cally, he said.

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