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Indonesia’s Tax Collection Target at Risk as Trade War Hurts

Indonesia’s Tax Collection Target at Risk as Trade War Hurts

(Bloomberg) -- Indonesia is bracing for a bigger-than-expected shortfall in tax collections as a global slowdown and simmering U.S.-China trade tension weigh on demand for the country’s commodities and manufactured products.

The finance ministry last month said tax collections would reach just 91% of the full-year target of 1,577.6 trillion rupiah ($111 billion), but now it seems they may fall short even of that lower goal, Yon Arsal, director for tax revenue and compliance, said in an interview Wednesday. Total taxes gathered rose 2.7% in the first seven months of the year, but collections from the mining and manufacturing sectors contracted 12.3% and 4.3% respectively, official data show.

The U.S.-China trade war has hurt demand for raw materials including coal, palm oil and rubber, the mainstay of Indonesian exports, prompting authorities to project a wider fiscal deficit and increased borrowing from bond markets. With subdued tax collections, the annual budget deficit may overshoot the revised 1.93% target and prompt the government to explore alternative ways to fill the gap.

Indonesia’s Tax Collection Target at Risk as Trade War Hurts

Tax collection would need to rise 9.3% from last year just to meet the 91% target, Arsal said, adding that “the tax office will keep striving to achieve that target, though the challenges will be great.”

Tax Breaks

President Joko Widodo has announced a slew of tax concessions to businesses from electric vehicles to housing, seeking to shield the trillion-dollar economy from the global slowdown. Southeast Asia’s largest economy grew 5.05% in the second quarter, its slowest pace in two years.

Tax collection from mining fell after PT Freeport Indonesia switched from open-pit to underground mining at its giant Grasberg copper and gold mine, significantly lowering production and exports, Arsal said. The income tax and value-added tax from imports, which make up about one-fifth of the nation’s total tax revenue, fell 3.58% in the January-July period, he said.

To make things worse, a move to accelerate tax refunds to some exporters and importers has led to a 30% jump in such payments, Arsal said. The tax authorities are now betting on a pick-up in government spending and a year-end surge in tax payments to prop up overall collections, he said.

The Center of Indonesia Taxation Analysis in Jakarta estimates total tax collections this year may reach no more than 88.7% of the target as imports weaken.

“Challenges are indeed in the tax refund and weakening imports,” said Yustinus Prastowo, the center’s executive director. “The situation is difficult.”

To contact the reporter on this story: Viriya Singgih in Jakarta at vsinggih@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Thomas Kutty Abraham, Michael S. Arnold

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