Tax Reformasi

In an effort to increase revenue and broaden the tax base the Government of Indonesia is proposing a number of reforms. When the House of Representatives returns from its recess it will be asked to vote on a reform bill that includes:

• The top corporate rate being cut to 28% in 2009 and 25% in 2010.

• For public companies rates would be 23% in 2009 and 20% in 2010.

• Companies with below 50 Billion in revenue would see rates fall to 14% in 2009 and 12.5% in 2010.

• Maximum dividend tax rate cut to 10% from the current 20%.

The government hopes to increase its collection of tax by making the tax rates more competitive with its neighbors such as Singapore. Currently government tax revenue amounts to Rp 580 Trillion which is 11.4% of GDP. Though the reforms proposed could see a Rp 40 Trillion fall in tax revenue, the government expects to see revenue rise in 2009 to Rp 702 Trillion, through greater tax compliance from the lowering of the tax rates. The biggest barrier is corruption by the tax department which typically sees bribes of 40% of the tax owed being paid tax department officials.

Another measure in the reform package that may help broaden the tax base is the gradual phasing out of the hated Fiscal Tax. Currently all Indonesian nationals and all foreigners working in Indonesia are required to pay a 1 Million Rp Fiscal Tax every time they leave the country. In theory you are able to claim this back when you file your taxes but in practice most people do not seek the refund as it is a sure method to bring about a tax audit and the subsequent bribes that will need to be paid.

As proposed in the bill, the Fiscal Tax will be eliminated for all registered taxpayers in 2009 and for everyone else in 2011. This measure, along with fines of 20% of the tax owed for people who do not register as taxpayers by the end of this year, is expected to increase the appeal of registering and broaden the tax base. Indonesia, a country of 225 million people has its budget supported by only 6 million registered taxpayers of whom only 2 million actually pay their taxes. The reforms are expected to increase the tax base to 10 million people by 2010.

Also in Indonesia.

In an effort to deal with growing inflationary pressure, Bank Indonesia has raised its policy rate by 25 basis points to 9%. This increase is part of continued rate rise that have seen the benchmark rate rise a full percentage point since may this year.

These efforts are to combat inflation which was reported as a rise in consumer prices by 11.9% in July. Food costs alone are running at 19.9%, the most in a decade.

Producer costs as measured by wholesale price inflation was running at 34.7% in June which suggest that there is greater inflationary pressure that has yet to work its way through the system. This could push inflation by the end of the year above the government’s 12.7% forecast for this year.

This rate rise would have been greater if the central bank had not benefited from the rise in the value of the Rupiah. In the last 10 months the Rupiah has been the second best performing of the major Asian currencies. The central bank hopes to get inflation under control and forecasts inflation at 6.5% to 7.5% in 2009.