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

Jakarta

INDONESIA'S Parliament approved a law on Thursday (Oct 7) for one of the country's most ambitious tax overhauls, including raising the value added tax (VAT) 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 per cent now to 11 per cent next April and to 12 per cent 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.

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Only 1 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 per cent 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 per cent of gross domestic product (GDP), and help authorities narrow the gap further to under 3 per cent 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. REUTERS