Indonesia Cuts Bond Income Tax for Local Investors to Record Low
(Bloomberg) -- Indonesia is cutting the income tax rate on bond interest to a record-low 10% for domestic investors, putting it on par with the rate for foreign funds.
The change is set to reduce distortions in bond prices between local and global investors, the government said in a revised regulation that took effect on Aug. 30. The new rate, lowered from 15%, applies to Shariah-compliant and conventional bonds sold by the government and companies.
“The lower tax rate could potentially attract more investors and push yields demand lower, so that even though the government earns lower tax revenue, the cost of funds will also be reduced,” said Handy Yunianto, head of fixed income research at PT Mandiri Sekuritas. He sees the policy reducing tax earnings by around 1.3 trillion rupiah ($91 million) this year and 3.8 trillion rupiah annually afterwards.
Indonesia cut the rate for foreign bondholders to 10% from 20% as of Aug. 1 as part of a broader legal overhaul aimed at attracting investment into the country. That has become more pertinent as the government again turned to the central bank to help finance its budget deficit via direct purchases of bonds, a move that risks turning away foreign investors due to concern over Bank Indonesia’s independence.
Southeast Asia’s largest economy has set a fiscal deficit target of 5.82% of gross domestic product this year and 4.85% next year in an effort to return the gap to its legal limit of less than 3% in 2023.
Indonesia’s bonds continue to see strong demand in recent auctions with total bids reaching 116 trillion rupiah on the latest sale on Aug. 31, the highest since February 2020. The government has cut its bond sales target after announcing the burden sharing agreement with the central bank. The yield on the 10-year benchmark bonds were little changed at 6.08% on Friday, set for a seven-basis point drop this week.
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