Indonesia begins process of increasing VAT and introducing carbon tax

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JAKARTA – The Indonesian government is set to increase state revenues affected by COVID by increasing its value-added tax and introducing other levies as part of an overhaul of a tax system that failed to register a large majority of Indonesians.

A draft bill seen by Nikkei Asia proposes that the carbon tax rate be set according to carbon market pricing, with a minimum rate of 30 rupees (less than 1 cent) per kilogram of CO2 equivalent.

Individuals and entities that “buy goods containing carbon and / or carry out activities that produce carbon emissions” must pay the carbon tax, the bill says. He adds that the revenues collected “can be allocated” to measures to combat climate change.

The bill does not indicate a timeline or when the carbon tax would be implemented. Other details need to be filled out by government and ministerial regulations, he said.

Indonesia recently advanced its goal of achieving net zero emissions by 2060, a decade earlier than previous plans. In this regard, the carbon tax is a kind of incentive, intended to make carbon-intensive activities and products more expensive and thus push the economy towards a less polluted future.

Other tax changes provided for in the bill include an increase in VAT from 10% to 11% from April 1 and to 12% before January 1, 2025. It also proposes a personal tax rate of 35% for those earning more than 5 billion rupees (approximately $ 350,000) per year. Indonesia currently has four brackets of personal income tax, ranging from 5% to 30%.

The government is also seeking to revive its tax amnesty program, a repeat of a similar 9-month plan in 2016-2017. The program will run over a shorter period, from January 1 to June 30, 2022.

Indonesia has long struggled with its tax system, especially compared to its regional peers. The archipelago’s tax-to-gross domestic product ratio was 11.9% in 2018, clearly lower than that of Thailand and the Philippines. It also remains well below the OECD average of 34.3%.

Indonesia has 270 million inhabitants, of which only 38.7 million were registered as taxpayers in 2019.

The government has fallen short of its tax revenue target in each of the past three years, including 2020, when it has had to increase spending to fight COVID-19 and make social assistance payments. Indonesia’s tax revenue for 2020 stood at 1.285 billion rupees, 16.8% lower than a year earlier. The government expects 1.404 billion rupees in tax revenue this year, 9% lower than the 2019 figures.

With the government set to return to its budget deficit ceiling of 3% to GDP in 2023, Jakarta needs additional revenue to balance its books. In the 2022 budget approved by parliament on Thursday, the government expects a budget deficit equal to 4.85% of GDP. The ratio was 6.14% in 2020 and is expected to be 5.7% in 2021.

President Joko “Jokowi” Widodo has an overwhelming majority in parliament, which should make it easier for the government to push through the tax reform. However, “Jokowi’s grand coalition has mixed views on the bill, so the president is likely to water down or remove some measures to secure the passage by the end of 2021, thus reducing potential revenue gains,” he said. political risk consultancy Eurasia Group said in a recent memo. .

“If negotiations postpone approval until 2022,” the memo continued, “then the impact on fiscal plans would be even greater. As a result, the administration is unlikely to keep its commitment to restore the deficit ceiling. budget of 3% of GDP. in 2023. “

Additional reporting by Ismi Damayanti

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