Indonesia May Tax The Rich, Top Polluters for More Revenue

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Indonesia is seeking to cast a wider net to tax more high-income individuals and top polluters to replenish state coffers.

The finance ministry presented the proposals, which could be part of key reforms this year, to a parliamentary commission this week. The government needs to collect more revenue to sustain spending while keeping its vow to bring the budget deficit back to within the legal limit of 3% of gross domestic product by 2023, from 6% last year.

“The goal of this tax reform is not just revenue collection but the sustainability of the state budget,” Finance Minister Sri Mulyani Indrawati said. “The whole world is also accelerating its revenue collection in the midst of soaring budget deficits and debt ratios. This is a response that must be done with caution.”

The finance ministry will be “very mindful and careful with the timing” of the tax measures, with the reforms possibly executed over the medium term, fiscal policy chief Febrio Kacaribu said in an investor call Tuesday. Citigroup Inc. economist Helmi Arman said in a separate report that Indonesia’s tax strategy risks burdening households and stoking inflation if it’s passed this year, when consumption hasn’t firmly recovered.

Here are the tax changes under study:

Carbon tax

Taxing carbon emissions will help Indonesia curb greenhouse gases while raising funds for green state investments and social welfare programs, Indrawati said. The government could use existing taxes such as excise, motor vehicle and fuel taxes to enforce it, or it could create an entirely new levy through a carbon tax.

The tax could apply to emission sources like fossil fuels, motor vehicles and factories, as well as carbon-intensive activities such as those in the pulp and paper, cement, power generation and petrochemical industries.

Income tax

Indonesia could add a new 35% income tax bracket for individuals earning more than 5 billion rupiah ($349,000) a year. Taxpayers are currently grouped into four brackets, with rates ranging from 5%-30%.

The country is poised to see the world’s fastest growth in the number of ultra-high net worth individuals in the next five years, according to a report by consultancy Knight Frank LLP.

Value-added tax

Indonesia could introduce multiple tiers for value-added taxes, with lower rates for basic necessities and higher ones for luxury items. It currently imposes a single tariff of 10% on all goods and services subject to VAT. With rice, corn, drinking water, electricity and financial services currently exempted, more items also could be subjected to VAT.

Even though consumption makes up the bulk of GDP, VAT accounted for only about 40% of the government’s tax revenue last year.

Digital tax

Indonesia is finalizing the formula to tax digital companies and impose levies on electronic transactions. The government has issued a law stating that taxes could be imposed on companies with significant economic presence in the country, but it hasn’t set out regulations for the tariff or how it would impose and calculate it.

Indonesia started collecting VAT on goods and services sold to residents through online platforms last year, with 65 companies appointed to collect the fee so far, including Google, Amazon, Shopee and Tokopedia.

Tax amnesty

Indonesia could take another stab at a tax amnesty program, following a 2016 program that uncovered some $336 billion in undeclared assets.

Taxpayers who have undisclosed assets as of the 2019 tax year might be able to settle their past obligations at current income-tax rates without sanctions, or might enjoy lower rates if the assets are invested in government securities. However, those who failed to disclose their assets during the first tax amnesty period in 2016 will have to pay income tax above the highest tax-amnesty rate.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.