Rendi A. Witular, Jakarta – With the primary aim of boosting investment in the private sector, the government has drafted a fairly sound and competitive value-added tax (VAT) and income tax system in its recently completed draft revision of the tax laws, according to an official.

Head of the tax law revision team, I Made Gde Erata, told The Jakarta Post the directorate had accommodated demands from the business community for the new laws to be competitive for businesses without harming state revenues from taxes.

"We are trying to make the laws as balanced as we can. We want businesses to gain advantages from them, but we also want state revenues to be sustainable. For sure, the laws are drafted to make it (the tax system) simple," said Erata.

As reported earlier, the ministry of finance's Directorate General of Taxation completed the revision of Law No. 18/2000 on VAT and luxury tax, and Law No. 17 on income tax on Aug. 16, which feature a progressive taxation system, both in term of rates and the types of taxes levied.

According to the draft law on VAT and luxury tax, which was made available to the Post, the government plans to scrap the VAT in a merger of companies, as well as certain activities in the agricultural and banking sector.

The government will also scrap the VAT on capital goods for companies that export services, including software, franchise and consultancy products.

The draft also shows that the government will allow companies just starting up their businesses to pay their VAT on capital goods in installments until after the companies commence production.

At present, the VAT is set at 10 percent, with no changes planned under the new draft.

Based on the 2006 state budget, the government expects to reap Rp 126.7 trillion (US$12.67 billion) from VAT and luxury tax, up from Rp 99.41 trillion for this year.

Meanwhile, in the income tax areas, Erata said the government would focus more on increasing the number of taxpayers as well as decreasing the rate of tax evasion.

Under the draft law on income tax, also made available to the Post, taxpayers who purchase shares or assets through a special-purpose vehicle (SPV) registered overseas will be subject to paying income tax.

Taxpayers are also liable to the tax if they transfer their shares or assets here to an SPV registered in a tax-haven country.

Several prominent companies operating in Indonesia have tried to reduce the amount of income tax they pay in the country, or have evaded paying it altogether, by setting up SPVs overseas.

The tax directorate previously indicated that potential tax revenue losses for the state from such practices could reach at least US$300 million annually.

"There are several practices of evading taxes that we have eliminated or limited in the draft laws. The financial system is so complicated nowadays and we should keep up with it in order to avoid potential tax revenue losses," said Erata.

Another example in the draft law aimed at limiting tax evasion is the requirement that all contractors operating in the energy and mining sector register themselves as permanent institutions here in order for the government to be legally able to collect their taxes.

At present, some foreign contractors and consultants operating in Indonesia in the sector have refused to set up permanent registration in order to avoid paying taxes. Based on the prevailing law, the government can only tax companies that are permanently registered in the country.

The proposed law also stipulates that aside from the primary taxpayers registration number (NPWP), an individual who is in business should have an additional registration number for his or her other addresses. This is to prevent businesspeople from running away to other areas to avoid paying their taxes.

Under the state budget, next year's income tax target is set at Rp 198.3 trillion, up from Rp 166.6 trillion this year.

Key points in the draft laws: VAT and Luxury taxes

• Taxes on luxury goods and services will be raised up to 200 percent from the current 75 percent.
• Mining products will be subject to VAT.
• Syariah banking activities will not be subject to VAT.
• Taxable goods will be scrapped from billing if a company faces bankruptcy.
• Public phones using coins, parking and money transfers through the post office will be exempted from VAT.
• Asset securities will be exempted from VAT.
• Leasing activities will be exempted from VAT.
• Electricity and water will be excluded as VAT objects.

Income tax

• Departure tax will be scrapped in 2010.
• Final income tax for dividend proceeds for individual taxpayers will be reduced from about 35 percent to 15 percent.
• Interest proceeds from government bonds will be subject to a 20 percent final tax.
• A transfer in mining concession rights, including the geothermal sector, will be subject to tax.
• Mutual funds proceeds from bonds will be subject to tax.
• The use of telecommunication bandwidth and broadcasting will be subject to tax.
• Scholarships, as well as aid donations for national disasters, education and research in Indonesia will be exempted from tax.
• Certain social infrastructure will be tax exempt.
• The minimum individual income exempt from tax will be raised from Rp 2.88 million to Rp 12 million.
• Income tax for corporations and institutions will be reduced to a single rate of 30 percent in 2006, 28 percent in 2007 and 25 percent in 2010.
• Income tax for individuals will be set at a 35 percent maximum for annual income above Rp 200 million, and 5 percent minimum for annual income below Rp 50 million. The maximum rate will be reduced to 33 percent in 2007 and 25 percent in 2010.
• Income tax for taxpayers without NPWP will be higher, between 20 percent and 100 percent compared those having NPWP.
• Investment in certain sectors and areas that are development priorities will receive tax incentives.
• Businesses in the mining, oil, gas and geothermal sectors, as well as in the syariah sector will be given tax incentives.
• Micro, small- and medium-scale businesses will be given tax incentives.

[Source: Directorate General of Taxation.]