Outrageous! Many Wealthy Individuals in Indonesia Enjoy Low Tax Rates
Jakarta, CNBC Indonesia - The ASEAN+3 Macroeconomic Research Office, a regional economic research body, has spotlighted inequalities in Indonesia’s personal income tax system. It assesses that there is a considerable gap between the tax burden shouldered by the super-rich group compared to other wealthy groups with lower incomes.
In its latest annual report, AMRO evaluates that the current tax structure is not yet fully optimal in boosting state revenues. Amid continuously increasing government spending needs, the taxation system is deemed in need of overhaul to make it fairer and more effective.
One of the main highlights is the excessively wide income range between layers of the highest tax rates. This condition means that some high-income groups are not yet fully subjected to rates that reflect their economic capacity.
As a result, the potential state revenue from the tax sector has not been maximised. AMRO thus urges the government to review the rate structure to make it more progressive and able to reach high-income groups more evenly.
“Currently, the highest personal income tax rate of 35% applies to individuals with annual income exceeding Rp5 billion. This is around 10 times higher than the second-highest income group, with a minimum of Rp500 million per year, which is subject to a 30% tax rate,” AMRO writes in its report.
To mobilise revenue from income-based taxation, AMRO assesses that the government needs to consider expanding tax groups for high-income recipients.
This is particularly because, although Indonesia has increased its income tax groups from four to five tiers, those groups are still fewer than in neighbouring countries, besides the large rate disparity between the super-rich and those below them.
“For example, Malaysia has nine income tax groups (1% to 30%), Singapore has twelve (2% to 24%), while Thailand and Vietnam each have seven groups (5% to 35%).”
AMRO also considers Indonesia’s personal income tax groups to be less progressive compared to some of its neighbours. As an illustration, taxpayers earning five times the average income in their respective countries face higher income tax rates than Indonesian taxpayers.
Furthermore, Indonesia’s top tax rate of 35% only applies to income over Rp5 billion, or about 141 times the national average wage, whereas the 30% rate applies to income from Rp500 million to Rp5 billion, or about 14 times the average wage.
Given the significant disparity in income thresholds between the 30% and 35% personal income tax rates, AMRO assesses that introducing additional tax groups for high-income recipients could also be considered by the government.
“The government also needs to consider reforming the personal income tax system by introducing more income groups between the second-highest and highest categories, given the current wide gap,” advises the AMRO economics team.
For information, the income tax rate layers are implemented by the government under the Harmonisation of Tax Regulations Law (UU HPP).
In this new law that began applying in 2022, the taxable income subject to a 5% rate has been expanded from those earning Rp50 million/year to Rp60 million/year. Then, the government imposes a higher tax of 35% on wealthy individuals with income above Rp5 billion/year.
Here are the details:
Taxable Income layer up to Rp60,000,000 (sixty million rupiah) is subject to a 5% rate
Taxable Income layer above Rp60,000,000 (sixty million rupiah) up to Rp250,000,000 (two hundred fifty million rupiah) is subject to a 15% rate
Taxable Income layer above Rp250,000,000 (two hundred fifty million rupiah) up to Rp500,000,000 (five hundred million rupiah) is subject to a 25% rate
Taxable Income layer above Rp500,000,000 (five hundred million rupiah) up to Rp5,000,000,000 (five billion rupiah) is subject to a 30% rate
Taxable Income layer above Rp5,000,000,000 (five billion rupiah) is subject to a 35% rate.