Wed, 09 Sep 2009
From: Reuters
By Gde Anugrah Arka and Dicky Kristanto
JAKARTA, Sept 9 (Reuters) - Indonesia's parliament is due to pass a revised law on value added tax (VAT) and sales tax on luxury goods next week, which could boost corporate mergers and spur the growth of its fledgling Islamic markets.

The government expects the new law to help lift its VAT revenue target by 30 percent to 267 trillion rupiah in 2010. VAT accounts for a third of the country's total targeted tax revenue.

The law will come into effect next year and will scrap the double taxation on financial products in the Islamic financial markets, effectively removing one of the key impediments to the growth of this industry.

It will also reduce the tax costs related to mergers, according to legislators and to drafts seen by Reuters.

Here are some questions and answers about the law:

WHAT WILL CHANGE AND WHAT IMPACTS WILL IT HAVE?

The VAT rate will be set between 5-15 percent of the selling price against a fixed rate of 10 percent currently.

The maximum rate for luxury goods sales tax will be set at 200 percent of the selling price, against 75 percent currently. The minimum rate remains unchanged at 10 percent.

The government is also expected to raise rates on sectors that have not been taxed, such for online purchases.

Details of which luxury goods will be affected and related tax rates will be provided in supporting government regulations next week, but local media have said high-end cars and yachts are likely to see higher VAT rates.

In the case of mergers and acquisitions, the transfer of taxable assets such as properties and vehicles to the buyer will no longer be subject to VAT.

There are currently around 120 commercial banks in the country, and the central bank is keen to see further consolidation. High tax costs are one of the barriers to M&A deals in the country.

The state enterprises ministry previously said it was considering merging tens of state firms into holding firms based on their respective industries, for example merging pharmaceutical firms Kimia Farma with Indofarma .

Major banks in which the state has stakes could also undergo mergers, including Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Bank Mandiri.

Transactions in the Islamic financial markets will no longer be subject to double taxes, moving in line with the tax treatment for conventional business transactions.

This is likely to encourage more companies to issue sharia-compliant products.

Property developer Bakrieland Development has said it expects to issue 500 billion rupiah worth of sukuk later this year, and others may follow suit.

Sharia-based banks such as Bank Muamalat, which is partly owned by Islamic Development Bank, and Bank Syariah Mandiri, a unit of Bank Mandiri, are expected to benefit from the removal of the double taxation.



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