Indonesia’s tax spinoff may disrupt revenue efforts, Fitch warns

PRABOWO Subianto’s plan to create a new state revenue agency outside of the finance ministry could do more harm than good for Indonesia’s tax collection, said Fitch Ratings.

It remains “unclear” how the president-elect’s plan would bolster long-term revenue collection, Fitch Ratings’ head of Asia-Pacific Sovereigns Thomas Rookmaaker said in an interview. Removing the tax and customs office from the ministry may worsen uncertainty and lead to operational hiccups, he added.

“In the short term, it could even cause some disruptions,” he said. To boost revenue, the government should remove tax exemptions and raise compliance instead, he said.

Indonesia has long struggled to raise earnings that match the size of its economy. Fitch expects state revenue to decline to 14.6 per cent of gross domestic product this year, the lowest among similarly-rated peers. That ratio is holding the country back from seeing upgrades to its credit rating, which at ‘BBB’ marks the second-lowest investment grade despite an improving external balance and robust growth.

Any disturbance to tax receipts could undermine Prabowo’s planned spending spree, including the free lunch and milk for school children that may cost as much as US$29 billion. The programme will widen the fiscal deficit to near the 3 per cent of GDP legal limit, Fitch said.

Still, the incoming president has promised to refrain from raising tax rates even as he aims to boost the tax-to-GDP ratio to up to 16 per cent during his tenure, from about 10 per cent currently, to keep the deficit within its cap.

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“It’s difficult to lift your revenue ratio by a couple of percentage points without raising or introducing new tax or raising tax rates. It’s a gradual process. There are no quick fixes,” Rookmaaker said. BLOOMBERG