The House of Representatives enacted on Wednesday a much-awaited amendment to the income tax law aimed at spurring economic activities by providing lower rates and more incentives to businesses, The Jakarta Post reported.
Income tax for corporations will be set at 28% flat next year, replacing the current progressive system, and will be further reduced to 25% at the start of 2010.
The new arrangement will not only benefit firms with high earnings, but also micro, small and medium businesses (MSME), which will have their income tax slashed by 50% from those of corporations. Companies that earn less than Rp50 billion a year are included in the MSME category.
"We pledge the tax amendment will be very supportive and friendly to all levels of business, but at the same time very stiff on any violations," said Dradjad Wibowo, a member of the House's Commission XI, which oversees financial affairs.
The new law will take effect next year, with the government estimating it will suffer some Rp40 trillion ($4.34 billion) in potential losses from tax revenue during the first year of implementation.
It provides incentives to encourage companies to go public. Companies that list at least 40% of their shares on the Indonesia Stock Exchange will see their tax rate cut by 5% compared to those of ordinary corporations.
Tax from the receipt of dividend payments will also be cut, on a progressive basis, to 10% from the current 35%.
The incentives are aimed at boosting investment in the country and encouraging companies to pay out dividends.
For individuals, the law raises the taxable income threshold to Rp15.84 million per year from Rp13.2 million per year, with the highest rate set at 30%, down from the current 35%.
Income tax rates for individuals will be divided into four categories: those earning up to Rp50 million per year will pay 5% tax, those earning between Rp50 million and Rp250 million will pay 15%, those earning between Rp250 million and Rp500 million will pay 25% and those earning more than Rp500 million will pay 30%.
The Directorate General of Taxation will also eliminate the overseas exit tax of Rp1 million effective next year for registered taxpayers. The tax will be fully eliminated in 2011.