Amending the tax laws

The four bills on taxation which Minister of Finance Mar'ie Muhammad unveiled to the House of Representatives on Saturday convey good news to the middle and high-income people as the lowest and highest tax rates will be reduced and the number of tax brackets will be increased from the current three to four.

The tax brackets and rates imposed by the current Income Tax Law of 1983 have been considered unfair to the middle-income earners whose number has increased rapidly over the past decade. The lowest tax rate under the current law, which amounts to 15 percent for an annual income of up to Rp 10 million (US$4,600), will be lowered to 10 percent for an annual income of up to Rp 25 million. This tax burden will be even lighter than it appears from the above figures due to the fact that the maximum amount of income deductible from the taxable income will be increased for a single (unmarried) taxpayer from Rp 960,000 to Rp 1.72 million and for a married taxpayer with three children from Rp 3.84 million to Rp 6.9 million.

This is how the tax reduction will reflect in the take-home pay of a single, fresh-out-of-the-university graduate working in the private sector, who normally gets a monthly salary of Rp 500,000. Under the present law, his monthly take-home pay amounts only to Rp 437,000, but under the new law his monthly net income will increase to Rp 464,400.

But perhaps the high-income earners and corporate taxpayers will reap the most benefit because the highest tax rate will be lowered from 35 percent for an annual income in excess of Rp 50 million to 30 percent for an annual income exceeding Rp 75 million.

The bill on income tax, besides reducing the tax burden, also allows companies to deduct expenditures on research and technology and human resource development from their taxable income.

The new legislation also vests a broader authority in the government to grant tax incentives to investors operating in particular locations and doing business in particular fields. This authority will put the government in a better position to attract investments to the business areas or locations which are given high priorities for development.

But for tax evaders, the news is not good. The bill on general tax provisions and procedures bears a heavier stick, or penalty, for tax evasion. The heaviest jail term for tax evaders will be doubled to six years from the current three, and the statute of limitations on the amount of time the tax director general has to correct the income tax returns already filed by taxpayers will be lengthened from five to 10 years.

The new general tax provisions and procedures allow not only for the confiscation of the assets of a taxpayer who owes the government tax arrears but also for the detention of the errant taxpayer for one year at the most.

It is thus clear that the four bills which will amend the four laws which were enacted in 1983 and 1985 under the country's first massive tax reform program are designed to accommodate new developments in the economic sector, but also, and more importantly, to improve the climate for business operations.

The bills maintain the principle of self-assessment in the filing of annual income tax returns, but provide a broader authority for tax officials to enforce a more vigorous tax collection drive.

One might conclude that the lower tax rates and the broader tax brackets would reduce, instead of raising, government tax receipts. But the bottom line of this measure actually will mean a boost in tax receipts. Because the lower tax burdens can be expected to help discourage tax evasion and stimulate new investments, thereby broadening the tax base.