Amending the tax laws

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.