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Covid stimulus running out threatens Indonesia's growth target

Bloomberg News - June 20, 2022

Claire Jiao and Grace Sihombing – Most of Indonesia's pandemic-era fiscal incentives are set to expire at the end of the month, adding a new layer of challenge to the economy already facing risks from quickening inflation and a looming increase in borrowing costs.

Removing tax stimulus for consumers and companies should help guide the fiscal deficit back under its legal limit by 2023. But the move could set back investment and consumption that are key to achieving the 5.2% growth target this year.

While businesses are starting to recover from the pandemic, such incentives are still crucial for harder-hit sectors like tourism, textiles and apparel, said Shinta Kamdani, deputy chairwoman at the Indonesian Chamber of Commerce and Industry.

It comes at a time when firms are also bracing for interest rate hikes and imported inflation as the rupiah weakens and prices of raw materials spike in the wake of Russia's war in Ukraine.

"We expect the government won't revoke all the fiscal incentives at once and consider extending them at least for some business sectors still struggling to recover to their pre-pandemic state," Kamdani said.It's also inevitable that winding back tax incentives should dent household spending, especially for big-ticket purchases like cars and properties, according to Maybank Investment Banking Group economist Lee Ju Ye. Still, the economy may be able to absorb the impact with private consumption topping pre-pandemic levels in the first quarter and unemployment easing in February.

"It is reasonable for the government to withdraw these tax incentives at this point to proceed with its fiscal consolidation plans," she said. "More targeted support for those who need help the most will be more sustainable than providing blanket incentives across all income groups."

Here are some of the tax perks that are set to expire:

Income taxes

  • Companies will lose the current exemption on income they earn from sale of imported goods
  • Also to go will be the reduced income tax installments for priority business sectors
  • Health sector too will lose its exemption from certain income taxes, including from sales of pandemic-related products
  • Health personnel stand to lose the 0% rate in final tax on additional income earned

Value-added taxes

  • Exemptions on VAT granted to government agencies, hospitals and other parties that contribute to medicines, vaccines, laboratory equipment, detection equipment, personal protective equipment, and patient care equipment will expire
  • That includes pharmaceutical firms that acquire vaccines or drug raw materials for the handling of Covid-19
  • And also taxpayers that acquire vaccines and/or drugs for the handling of Covid-19

Luxury VAT on cars

  • The exemption of luxury tax payment on new cars priced 200 million rupiah or lower will end
  • Purchases made this quarter will be charged a 1% luxury tax, with the rate increasing to 2% next quarter and then the full rate of 3% in the fourth
  • For cars priced between 200 million and 250 million rupiah, the rate is 7.5% in the first quarter, and 15% this quarter

VAT on houses

Also due to expire in September are the 50% VAT discount on purchases of homes valued less than 2 billion rupiah, and the 25% concession on those worth between 2 billion to 5 billion rupiah

Source: https://www.bnnbloomberg.ca/covid-stimulus-running-out-threatens-indonesia-s-growth-target-1.178108