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Indonesia delays 40% to 75% entertainment tax as consumers and businesses push back against higher prices

Channel News Asia - January 25, 2024

Rhea Yasmine Alis Haizan, Singapore/Jakarta – A 40 per cent to 75 per cent entertainment tax on the price of certain goods and services may soon be implemented in Indonesia, much to the displeasure of businesses and consumers, who say that the steep increase could push customers away from visiting affected establishments.

The price of a cocktail sold at a club, for example, would see an increase from IDR 200,000 (US$12.63) to anywhere between IDR 280,000 and IDR 350,000 due to the tax on goods and services at affected entertainment locations.

According to the Jakarta Post, the new tax hike is based on a 2022 law on fiscal relations between the central government and regions. It will apply to entertainment services such as karaoke lounges, nightclubs, bars and spas.

But prominent industry players, including Bali's Indonesian Tourism Industry Board (GIPI) chairman Hariyadi Sukamdani, have pushed back, refusing to accept the higher tax rates and taking legal action against the proposed increase.

On Jan 17, Coordinating Minister for Maritime and Investment Affairs, Luhut Binsar Pandjaitan said on his Instagram account that the government has decided to postpone increasing the entertainment tax rate, which was slated to take effect this January.

According to the Jakarta Post, Mr Luhut said that the government has decided to evaluate the policy for the time being.

Despite this, the capital city of Jakarta has already imposed a 40 per cent entertainment tax.

Leisure and wellness sectors under threat

In December 2023, Indonesia adjusted the entertainment tax to range between 10 per cent to 35 per cent. Before that, entertainment taxes had no minimum rate and were subject to a maximum rate of 75 per cent, based on a 2009 regulation.

The entertainment tax of each region is determined by the regional governments.

A spokesperson of a spa business based in Bali told CNA that the proposed tax increase would pose a substantial threat to the wellness industry in Indonesia."(This is) especially in Bali, which is primarily fuelled by foreign tourists," said Sundari Day Spa employee Ms Devi Vania Coslavita.

She explained that the drastic tax hike, if implemented, could "divert market interest to competitor countries" – such as Malaysia, Vietnam, Singapore, Thailand, and India – and affect Indonesian tourism in the long run.

She told CNA that Sundari Day Spa is currently evaluating strategies such as cost-cutting measures and optimising efficiency in order to retain customers in the face of the proposed tax increase.

"Balancing affordability and operational costs is a complex challenge ... we will make every effort to minimise the impact on (the customers') overall spa experience," said Ms Devi.

She also took issue with the spa industry being included in the tax hike.

"The spa industry is inherently aligned with wellness and fitness activities, serving as a primary avenue for physical, mental, and spiritual healing.

"Labelling it as entertainment, akin to nightclubs and discos, is inappropriate and contradicts its fundamental purpose," she said.

Sundari Day Spa is part of the Bali Spa Bersatu (BSB) community, one of the groups that initiated a judicial review of the policy at Indonesia's Constitutional Court.

Meanwhile, Ms Cloudida Risman, a 34-year-old digital marketing specialist based in Jakarta, told CNA that she may no longer choose to celebrate work events at karaoke lounges if the tax increase is implemented.

Ms Cloudida said that she uses the office budget for leisure activities to pay for the karaoke sessions at the end of business trips.

"We might go to a restaurant and order a big dinner instead," she said, adding that the office will be reluctant to increase the entertainment budget.

For an upcoming two-hour karaoke session for a total of 16 people in Bandung, West Java, Ms Cloudida has a budget of IDR 2 million, not inclusive of snacks that they may order during the session.

She also said that she would not go to karaoke lounges as much in her free time anymore. "I will go, probably, once a year with my family," she said.

She added that she hoped the new entertainment tax hike would not be implemented as "(Indonesia's economy) has not fully recovered from the pandemic". "I fear it might influence other prices to go up as well," she said.

Two karaoke places – one in Bandung and one in Jakarta – told CNA that they have not increased their prices yet.

On Monday (Jan 22), Mr Hariyadi urged regional governments to delay any enforcement of the tax increase until a court ruling over the policy has been issued.

"The hike has been imposed without prior consultation with us or any open communication with the affected industry," said Mr Hariyadi after a meeting with Chief Economic Minister Airlangga Hartarto in Jakarta, according to the Jakarta Globe.

"There was never a public dissemination about the plan to raise the tax."

Mr Made Supriatma – a visiting fellow at the ISEAS-Yusof Ishak Institute in Singapore – told CNA that from a fiscal standpoint, the tax hike will not significantly contribute to government revenue, particularly at the regional level, noting that not all forms of entertainment are subject to the tax hike.

Cinemas, fashion shows, beauty pageants, and music concerts, for instance, are exempt from such increases, he said.

According to Kompas, business leaders' frustrations towards the tax increase is because imposing a minimum 40 per cent entertainment tax will affect the recovery of the tourism sector following the COVID-19 pandemic.

But Mr Airlangga was cited in the publication saying that the entertainment sector within the tourism industry has already recovered significantly since the health crisis, as evidenced by how the entertainment tax deposit shot up by 41.5 per cent to IDR 2.01 trillion by November 2023.

On Jan 19, he announced that the government would review a tax reduction in corporate income tax for the tourism sector, bringing the rate from 22 per cent down to 12 per cent.

Commenting on this, Mr Made said that the tax incentive is directed towards companies, while it is the consumers who bear the burden of paying entertainment taxes.

On Jan 17, Mr Luhut noted that the tax hike would affect many sectors, extending beyond the entertainment businesses itself, such as small and medium enterprises (SMEs), according to the Jakarta Post.

Even before the new policy was introduced, several regions in Indonesia had already imposed entertainment taxes between 40 to 75 per cent.

According to Kompas, six regions which already have a 75 per cent tax rate are Aceh Besar, Banda Aceh, Binjai, Padang, Kota Bogor and Depok.

Mr Made said that such high taxes cater to regions with strong religious influences, particularly those with a significant Islamic presence.

He explained that in these regions, alcohol consumption is either strictly limited or completely prohibited, and entertainment that involves unrestricted interaction between men and women is also curtailed.

"The 75% entertainment tax is tailored to accommodate the specific interests and values of these regions. This increase in entertainment tax reflects the underlying ideological differences within Indonesian society," said Mr Made.

The tax hike could also pave ways for illegal businesses and activities to pop up.

GIPI chairman Mr Hariyadi reportedly said on Monday that the increase in entertainment tax could hinder the businesses' operations and force them to close, leaving a void for illegal businesses to fill.

"Do we want to shut down the (legitimate) entertainment industry or allow an illegal industry to thrive?" he asked, according to the Jakarta Post.

Indonesia's tourism industry could also lag behind that of its competitors in the region, such as Thailand which recently announced a reduction on taxes for nightlife businesses.

According to local media, tax rate on nightlife or nightlife businesses in Thailand will fall from 10 per cent of revenue to 5 per cent for a one-year term ending Dec 31, 2024.

Ms Shinta Kamdani, chairwoman of Indonesia's employers association Apindo, noted that the higher taxes could make Indonesia a less attractive tourism destination.

"We will not be able to compete (with other countries). Thailand today attracts much more tourists compared to Indonesia. And now we have these additional tax burdens," she was quoted as saying by the Jakarta Globe.

Over in the Indonesian resort island of Bali, regency leaders are discussing loopholes that would allow local businesses to legally reduce their tax contributions, reported The Bali Sun.

In 2023, Bali welcomed around 11 million foreign tourists.

Source: https://www.channelnewsasia.com/asia/indonesia-tourism-entertainment-tax-leisure-407278