Indonesia’s parliament has passed a long-awaited law cutting corporate and personal income tax rates to broaden the country’s relatively tiny tax base and stimulate economic growth.
Analysts hailed the legislation as a major milestone in Indonesia’s transition to a more business-friendly market. But they cautioned that further reforms are needed, particularly in labour regulations and the legal sector, to improve the investment climate.
The new rates make Indonesia’s tax rates lower than everywhere in Asia apart from Singapore, Hong Kong and Malaysia. They will come into effect on January 1.
The government estimates the cuts will cost Rp40,000bn ($4.3bn) in lost revenue but expects this to be compensated for by increasing the number of taxpayers, which is currently only 6m of the 235m population.
Nick Cashmore of CLSA in Jakarta said: “This is good news for the private sector and it’s good news for individuals. So, on the long term, it’s good news for Indonesia because it will encourage investment.”
He predicted it would take the government less than 18 months to recoup the money lost by lowering the tax rates.
Under the new regime, the progressive corporate tax rates from 10 per cent to 30 per cent will be replaced with a flat 28 per cent rate that will drop to 25 per cent in 2010. Most enterprises with a gross turnover of less than Rp50bn ($5.4m) will enjoy a 50 per cent reduction.
Companies which have at least 40 per cent of their shares floating freely on the Jakarta Stock Exchange will be entitled to a further 5 per cent reduction in corporate tax.
For individuals, the maximum income tax rate will be lowered to 30 per cent from 35 per cent, other bands altered and the tax threshold will be raised by about 20 per cent, depending on marital circumstances, to an annual income of Rp15.8m.
Taxes on share dividends will be halved to 10 per cent.
Darmin Nasution, the head of the tax department, said he expects tax revenue, as a percentage of gross domestic product, to drop from 29 per cent to 21 per cent next year before climbing again.
Tax revenue in the first half of this year was 49 per cent higher than the same period last year, mainly on the back of sustained economic growth of more than 6 per cent. Mr Darmin has said that total receipts for 2008 might be as much as Rp640,000bn, or 20 per cent higher than the initial forecast.