Last week's passage of the income tax law is the best Idul Fitri gift the country could provide to our businesses and fellow taxpayers. The law provides a real incentive for investors to do business and for people to work harder.

Unlike past tax breaks, which benefited only certain companies, especially those with close ties to the power holders, this newly passed income tax law gives incentives to all businesses in the form of reduced rates.

The new law sets corporate income tax at 28 percent flat in 2009 and 25 percent in 2010, replacing the existing progressive system, which could go up to 35 percent. Under the current system, most corporations end up paying 35 percent.

This reduction in income tax rates serves as a real incentive for businesses. In the past, the government has actually provided a number of tax incentives, including in income tax, but all those incentives came with strings attached, which often meant higher costs for companies in order to benefit.

These new income tax rates mean Indonesia is becoming more competitive in attracting new investment as its rates are now on par with those in neighboring countries, especially Malaysia, Thailand and Vietnam – all of which have corporate incomes tax rates around 25 percent. (Singapore is an exception: Its income tax rate sits at 18 percent).

High income tax has in the past discouraged investors from investing directly in Indonesia. Some foreign investors investing in the country had their offices incorporated overseas to avoid the high income tax. Not only that, a number of local investors invested in Indonesia through foreign legal entities, again to avoid the high income tax. Now, with this new income tax law, we expect these investors to invest directly through legal entities in Indonesia.

Not only that, we expect these foreign investors will take their local companies public by listing them on the local stock market to gain further benefits from the new tax law. Any companies that have at least 40 percent of their shares listed and traded on the local stock exchange will have their income tax rate cut by 5 percent. This kind of incentive was simply nonexistent before.

This incentive is good not only for those listed companies but also for the country. As more and more companies go public, they will be subject to greater market transparency. They will thus have more solid ground to grow on and will then share their increasing profits with more people.

The new income tax law is also good for micro, small and medium enterprises (MSMEs), which in the past were subject to different income tax rates depending on their profit margins. Now, any business with a turnover of less than Rp 50 billion (US$5.5 million) will be required to pay only half the normal income tax rate, meaning they will pay 14 percent next year and 12.5 percent in 2010.

This lower rate for MSMEs will encourage their development, and as they grow, they will eventually graduate and pay the full amount of income tax.

But it's not only MSMEs, publicly listed companies and the corporate sector in general that benefits – this law is also good for individual taxpayers.

This law benefits individual taxpayers in two ways: by increasing the minimum taxable annual income threshold from Rp 13.2 million to Rp 15.84 million, and by cutting the maximum income tax rate from 35 percent to 30 percent.

Unlike the flat rate for businesses, this law imposes progressive tax rates for individual taxpayers, varying from as low as 5 percent to as high as 30 percent. This progressive rate aims to protect low-income earners, who form the majority of the Indonesian workforce.

Further good news from the new income tax law is that the government will waive the exit tax of Rp 1 million starting next year for registered taxpayers and will eliminate it altogether in the following year, 2010. This is good for encouraging travel, especially to the founding member countries of ASEAN, for which a visa is not required.

With all these real incentives for taxpayers, both commercial and individual taxpayers, the government is prepared to lose Rp 40 trillion in tax revenue next year when the law comes into force. But the benefits far outweigh the losses. And these losses will soon be recovered through increased economic activity and thus increased tax revenue in following years.

All in all, this new law is good for everyone: Good for corporations, good for MSMEs, good for publicly listed companies good for individual taxpayers. And so it must be good for the government and the country.