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Indonesia passes major tax overhaul bill, VAT to rise next year


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FILE PHOTO: Seats at the main assembly room at the parliament building are left largely empty as attendance is limited to curb the spread of the coronavirus outbreak (COVID-19) during the delivery of the annual State of the Nation Address by Indonesian President Joko Widodo, ahead of the country's Independence Day, at the parliament building in Jakarta, Indonesia, August 16, 2021. Achmad Ibrahim/Pool via REUTERS


JAKARTA (Reuters) - Indonesia's parliament approved a law on Thursday for one of the country's most ambitious tax overhauls, including raising the value added tax rate next year, a new carbon tax and cancelling a planned corporate tax cut.


The law is aimed at optimising revenue collection and improving tax compliance, after state coffers took a big hit last year due to the COVID-19 pandemic, Law Minister Yasonna Laoly told parliament after the vote.


But some business groups and analysts have questioned the timing of planned tax hikes, with the economic recovery from the pandemic seen as still fragile.


The law calls for the VAT rate for sales of nearly all goods and services to be raised from 10% now to 11% next April and to 12% by 2025, according to a copy reviewed by Reuters.


It also scrapped a planned corporate tax cut and introduced a higher income tax rate for wealthy individuals, a new carbon tax and a new tax amnesty programme.


Only one of 9 political parties opposed the passage in parliament.


"With the application of this law, alongside fiscal reform and ensuring a more targeted government spending, we hope we can strengthen the economic recovery and accelerate the reduction of poverty," Yasonna said.


The inflation impact from the VAT increase was seen as "limited and minimal", he added.


The government has made some concessions from its original proposals. Initially, it had sought to raise VAT to 12% in one go and proposed a minimum tax for loss-making companies suspected of tax avoidance.


Some analysts said the measures should boost tax takes next year, potentially reducing the fiscal deficit below the current official estimate of 4.85% of gross domestic product (GDP), and help authorities narrow the gap further to under 3% in 2023. The government has not yet said how much it expect revenues to rise.


Josua Pardede, Jakarta-based Bank Permata's economist, expected the measures to have a positive impact on long-term fiscal sustainability, but he warned the VAT hike would erode the purchasing power of low income earners, who are more sensitive to rising prices.


"We hope the government (can) improve the effectiveness of strategic spending, especially for social protection, next year," Pardede said, predicting an up to 0.3 percentage point increase in inflation and a slight deceleration in GDP growth in 2022.


The mall operators association, which has been lobbying for the VAT hike to be delayed for three years, lamented its passage.


"The impact of COVID-19 did not end when restrictions were lifted. A VAT hike amid an ongoing pandemic will aggravate the blow to offline sales," said Chairman Alphonzus Widjaja.


The tax amnesty programme, which will run in the first half of next year, has also received criticism. Opposition lawmakers said launching an amnesty while raising the VAT rate was unfair, while economists said repeated amnesty programme could cause moral hazard.



-- © Copyright Reuters 2021-09-13


(Reporting by Gayatri Suroyo and by Fransiska Nangoy; Editing by Kim Coghill)

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Quite interesting ! A 1% increase in VAT is not so punitive for the majority of non wealthy Indonesians.

Abandoning a corporate tax cut is more significant because there are many disproportionately  wealthy in Indonesia that ride on the backs of the poor.

Associated to that will be the effect of a carbon tax on such as the proliferate destruction of natural forestry for palm oil production supported by multinational investment.

Joko has been forced to make some concessions to the "old school" mentality as well as enacting some "less than populist" legislation but overall managed to retain overall popular support in spite of.

As his term in office is ending I hope Indonesia continues to progress in defiance of the difficulty in administering the worlds largest archipelago nation.



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