Indonesia's government has approved a substantial tax reform package, with the value added tax (VAT) set to rise next year

[ASEAN NOW Content Team]

 

On Thursday, Indonesia's parliament passed a law implementing one of the country's most comprehensive tax reforms, including an increase in VAT next year, a new carbon charge, and the cancellation of a scheduled corporate tax cut.

The measure is geared at increasing revenue collection and enhancing tax compliance after the COVID-19 pandemic affected state coffers hard this year and in 2020.

The new fiscal measures, according to Finance Minister Sri Mulyani Indrawati, will increase tax income by roughly 139.3 trillion rupiah ($9.80 billion) next year, bringing the tax ratio of Southeast Asia's largest economy to 9.22 percent of GDP, up from 8.44 percent without the new law.

 

However, some business groups and analysts have questioned the timing of the tax increases, citing the shaky economic recovery following the pandemic.

According to the law, the value-added tax (VAT) rate on practically all goods and services would be hiked from 10% to 11% in April of next year, and to 12% by 2025.

In addition, it eliminates a planned corporate tax cut and replaces it with a higher income tax rate for the wealthiest, a new carbon tax, and a new tax amnesty scheme.

 

The measure was adopted by all political parties in parliament except one.

 

"Through this law, we hope to maximise government revenue, create a more equitable tax system... and grow our tax base in this period of globalisation, when digital technology is so prevalent," Sri Mulyani stated.

 

According to the minister, the new tax measures will contribute less than 0.5 percentage point to headline inflation and have no impact on economic development.

From its original proposals, the government has made several concessions.
It had originally recommended a one-time increase in VAT to 12 percent and a minimum levy for loss-making businesses accused of tax evasion.