Aditya Suharmoko and Alfian, Jakarta – Businesses have praised the newly endorsed income tax law, saying it will boost the competitiveness of Indonesia's economy amid tougher global competition.
The House of Representatives endorsed last week the income tax law in a plenary session, with lawmakers boasting it is one of the most business-friendly laws they have ever enacted.
"The (new) income tax law is in line with businesspeople's aspirations. It will promote a favorable investment climate," M.S. Hidayat, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), said last Friday.
In the new law, income tax for corporations will be set at 28 percent flat in 2009, replacing the existing progressive system which could go up as high as 35 percent. The rate will be further reduced to 25 percent in 2010.
The rate will be reduced a further 50 percent if the company concerned is categorized as a micro enterprise, or a small and medium enterprises (MSME) – or is classed as a company earning less than Rp 50 billion per year.
With a 14 percent rate in 2009 falling to 12.5 percent in 2010, MSMEs are expected to grow further.
"The 25 percent income tax (for corporations) will make Indonesia relatively competitive compared to the income tax level in other ASEAN countries – Singapore 19 percent, Thailand 25 percent, Vietnam 24 percent, Malaysia 25 percent," Hidayat said. While tax rate cuts in 2009 will cause some falls in revenue, overall tax revenue will increase, as it is anticipated that more taxpayers will be tax compliant, he said.
The government has estimated it may lose Rp 40 trillion (US$4.26 billion) in tax revenue next year due to new tax cuts.
However, government expects to collect Rp 726.3 trillion in tax revenue next year, in the proposed 2009 state budget, up by 19.2 percent from Rp 641 trillion expected this year.
"There is nothing negative in the (new) tax law," Hidayat said, adding that Russia's state revenue grew by 400 percent after the country cut corporate income tax from 40 percent to 15 percent.
Investment Coordinating Board (BKPM) chairman M. Lutfi said the new tax law would help attract investors to Indonesia. Lutfi said many local investors had previously invested in Indonesia through foreign companies to avoid high income tax.
House of Representatives' member Dradjad H. Wibowo said the law would support all kinds of businesses, while at the same time being "stiff on any violations".
The new law will also support companies that list at least 40 percent of their shares on the Indonesia Stock Exchange. They will get their tax rate cut by a further 5 percent.
The central bank will start paying income tax of 30 percent next year and 28 percent in 2010, but only if it has a budget surplus.
Individual taxpayers will also be pleased that the taxable income threshold for them has been raised from Rp 13.2 to Rp 15.84 million per year in a bid to help ease the burden of low-income families, who spend nearly 70 percent of their income on food, while food prices are increasing.
The House and the directorate general of taxation have also agreed to improve the income tax rates for individuals. The rates did vary from 5 percent to 35 percent and this ceiling is now being reduced to 30 percent.
To tap more taxpayers, the directorate general of taxation will phase out the Rp 1 million exit tax starting 2009 for registered taxpayers. The exit tax will be eliminated by 2010.