Indonesia is accelerating its planned tax reforms, including cutting corporate income tax and collecting taxes from tech companies, as part of the financial playbook to fund COVID-19 relief efforts.
Finance Minister Sri Mulyani Indrawati said the government expected a 10 percent drop in tax revenue this year as a result of incentives for businesses to help them cope with COVID-19 and reduced non-tax revenue on account of falling commodity prices.
Meanwhile the government will add Rp 405.1 trillion (US$24.6 billion) in state spending for health care, a social welfare safety net and financial stimulus packages for small and medium businesses, anticipating a 5.07 percent budget deficit in relation to the gross domestic product (GDP).
“We decided to tax digital companies with an electronic transaction tax because their sales have soared amid the COVID-19 outbreak,” Sri Mulyani told a teleconferenced briefing. “They will be the government’s tax base, especially such as today when we use Zoom or Netflix. The companies are not present in Indonesia so they can’t be taxed. But their economic activities are huge.”
Meanwhile, advancing with the plan to cut the corporate income tax rate, which was previously planned for in the omnibus bill on taxation, will reduce the corporate burden “so they can prevent layoffs as well as avoiding bankruptcies”, she said.
The stipulations are covered in Government Regulation in lieu of law (Perppu) No. 1/2020 signed on Tuesday by President Joko “Jokowi” Widodo. Corporate income tax will be reduced from 25 percent to 22 percent for 2020 and 2021 and will be further reduced to 20 percent starting 2022.
The government will further cut corporate income tax by 3 percent to 19 percent in 2020 and 2021, and to 17 percent for 2022 for public companies with at least 40 percent shares traded in the stock market.
The major changes were initially planned in a government-initiated landmark omnibus bill on taxation that had been submitted to the House of Representatives in February. The bill aims to create a more open business climate and attract foreign funds as the country’s economic growth slowed to 5.02 percent last year, the lowest in four years.
Sri Mulyani said Indonesia’s economy was projected to grow 2.3 percent this year, the lowest in 21 years, as the COVID-19 halts swaths of economic activity. The government is also preparing for a worst-case scenario in which the economy will contract by 0.4 percent if the pandemic is prolonged.
The Perppu also exempts workers from paying income taxes for six months for those with incomes below Rp 200 million per year, as well as deferred import tax payments for six months for 19 manufacturing industries. It will also speed up repayments of overpaid taxes.
“This is good news because the pandemic already has had a severe impact on almost all business sectors,” Center for Indonesia Taxation Analysis (CITA) executive director Yustinus Prastowo said. “This will help the cash flow of firms and individuals.”
World Bank lead economist for Indonesia Frederico Gil Sander said that the structural policies in the omnibus bill on taxation would be important in maximizing the speed of the recovery, adding that the government must look for ways to generate more revenue after the COVID-19 outbreak subsides.
“The measures in the omnibus bill on taxation will only lead to revenue declines,” Sander told The Jakarta Post over the phone. “We do think that they should be complemented by additional measures that would help the government to increase revenue sustainably in the medium-term.”
The Perppu will levy an electronic transaction tax on e-commerce activities carried out by foreign individuals or digital companies with a significant economic presence. It also charges value-added tax (VAT) on taxable intangible goods and/or services sold on electronic platforms.
A significant economic presence will be determined through the companies’ gross circulated products, sales and/or active users in Indonesia, the Perppu reads. Those with a significant economic presence will be declared permanent establishments and, thus, be subject to domestic tax regulations.
A recent report by Statqo Analytics revealed that the number of active Zoom users increased by 183 percent last month, as most businesses in the country implemented working from home on March 16.
Digital companies that fail to comply with the rules will face an administrative sanction and even have their internet access cut by the Communications and Information Ministry.