Indonesia approves tax amnesty to fund widening budget gap

[JAKARTA] Indonesia's parliament approved a tax amnesty that the government says will draw in billions of dollars needed to finance a widening budget as it steps up infrastructure spending to spur economic growth.

Lawmakers voted in favor of the bill during a plenary session in Jakarta on Tuesday, among the final steps before it becomes law. Individuals who repatriate undeclared assets held abroad will face a penalty of 2 per cent to 5 per cent, according to the bill.

President Joko Widodo is facing a revenue squeeze in the face of weaker commodity prices and slower growth in Southeast Asia's biggest economy. To keep the budget deficit under 3 per cent of gross domestic product, Widodo is banking on the tax amnesty to help plug the shortfall.

The central bank forecasts the tax plan will help draw 560 trillion rupiah (S$56.11 billion) of funds back to the country and earn the government 53 trillion rupiah of revenue that may add 0.3 percentage point to economic growth.

"To keep this year's budget deficit below 3 per cent of GDP, the government needs to cut spending and/or increase revenue collection," economists at DBS Group Holdings Ltd in Singapore, said in an e-mail before the plan was approved. "A lot of hopes are on the tax amnesty law."

DBS estimates that the budget deficit for January to April stands at 158 trillion rupiah, more than double the amount recorded in the same period last year.

Indonesia's rupiah and equities gained after the decision. The currency strengthened 1.2 per cent to 13,180 a dollar, the highest level since May 3, according to prices from local banks. Jakarta Composite Index of shares rose 0.8 per cent, set for the steepest gain since June 7.

The amnesty bill sets a penalty of 4 per cent to 10 per cent on individuals who report assets held abroad but decline to repatriate the funds. Participants must keep the funds onshore for three years.

"The finance ministry needs to ensure high participation is met by systems and human resources ready to process the claims, then make sure the revenue is quickly spent to support growth," David Sumual, chief economist at PT Bank Central Asia, said before the plan was approved.

The tax amnesty was seen as a test of political support for Mr Joko. His administration earned a majority in parliament when Golkar, the second-largest party, left the opposition to formally support him in May. A majority of parties at the finance commission agreed to approve the bill, while adding lengthy disclaimers to their decisions.

"Empirically, the success rate is minimal and countries that do this are seeking to plug shortfalls," Kardaya Warnika, lawmaker for Gerindra party, which stands in opposition to Mr Joko's government, said at the commission meeting on Monday. "If the country isn't in a revenue crisis, then Gerindra would reject this bill, but because the country is in a crisis, then Gerindra accepts."

Lawmakers also approved revisions to the 2016 budget, including setting the GDP growth forecast for this year at 5.2 per cent and the fiscal deficit at 2.35 per cent of GDP.

BLOOMBERG