The House of Representatives on Tuesday enacted a much-awaited amendment to the income tax law aimed at spurring economic activities by providing lower rates and more incentives to businesses.
Income tax for corporations will be set at 28 percent flat next year, replacing the current progressive system, and will be further reduced to 25 percent at the start of 2010.
The new arrangement will not only benefit firms with high earnings, but also micro, small and medium businesses (MSMEs), which will have their income tax slashed by 50 percent from those of corporations.
Included in MSMEs are companies that earn less than Rp 50 billion a year.
"The contents of the amendment are similar to what we discussed earlier in the commission. There are no big changes," said Dradjad Wibowo, a member of the House's Commission XI, which oversees financial affairs.
"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," he said.
The new law will take effect next year, with the government estimating it will suffer some Rp 40 trillion (US$4.34 billion) in potential losses from tax revenue during the first year of implementation.
President Susilo Bambang Yudhoyono pledged early on in his tenure that his administration would focus on creating a pro-growth and pro-job-creation environment.
The new income tax law, which was delayed for several years because of vested interests within the legislative body, is part of Yudhoyono's pledge to create such an environment.
It provides incentives to encourage companies to go public. Companies that list at least 40 percent of their shares on the Indonesia Stock Exchange will see their tax rate cut by five percent compared to those of ordinary corporations.
The Finance Ministry's Directorate General of Taxation believes the scheme will help encourage more firms to go public, thus increasing good corporate governance and empowering the capital market as the main source of funding.
Tax from the receipt of dividend payments will also be cut, on a progressive basis, to 10 percent from the current 35 percent. 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 15.84 million per year from Rp 13.2 million per year, with the highest rate set at 30 percent, up from the current 35 percent.
The amendment comes as a relief to lower income citizens, who on average spend 70 percent of their income on food, and who have suffered of late from soaring food and commodity prices.
Income tax rates for individuals will be divided into four categories: Those earning up to Rp 50 million per year will pay 5 percent tax, those earning between Rp 50 million and Rp 250 million will pay 15 percent, those earning between Rp 250 million and Rp 500 million will pay 25 percent and those earning more than Rp 500 million will pay 30 percent.
The Directorate General of Taxation will eliminate the overseas exit tax of Rp 1 million effective next year for registered taxpayers. The tax will be fully eliminated in 2011.