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.