JAKARTA (TheInsiderStories) – Boosting investment has been an economic priority for President Joko Widodo, particularly since sluggish consumption has capped annual economic growth at around 5 per cent for several years.

Finance Minister Sri Mulyani Indrawati has said several regulations are being revised to provide more tax incentives to business people interested in investing in the country.

She said in that the four incentives were in the form of tax allowances, tax holidays, tax deductions for small and medium enterprises (SMEs), as well as incentives for companies that carried out research and development (R&D) activities.

On tax allowances, Sri Mulyani said the government would expand the number of business sectors that would be eligible for the incentives, including income tax deductions.

She said the expansion plan was based on an instruction issued by the President and recommendations from a number of ministries. The business sectors that will receive the tax allowance will be announced after the revision of the finance ministerial regulation.

Meanwhile, the second incentive was a tax holiday in which the government would offer income tax deductions of between 10 and 100 percent. Tax allowance and tax holiday rules, last revised in 2016, had failed to attract a significant amount of investment into the country.

Indonesia’s tax revenue over eight years. (Graphic: The Insider Stories)

The government is planning to change the minimum investment required to get a tax holiday. At present, the minimum investment ranges between Rp500 billion ($36.7 million) and Rp1 trillion.

The third incentive is related to tax deductions for SMEs, said Sri Mulyani, adding that her ministry needed to revise Financial Ministerial Regulation No 250/1995 on SMEs to accommodate the incentive. The fourth fiscal incentive is the income tax deductions of up to 200 per cent for companies carrying out R&D activities, she added.

Although the Indonesian government offered various attractive incentives to investors (tax holidays and tax allowances) in 2017 in an effort to encourage investment in pioneering industries (particularly the downstream oil & gas industry), there were no companies that took advantage of these incentives.

How come investors were not interested in these incentives?

According to Deputy Finance Minister Mardiasmo, the lack of response from investors could be due to confusion about procedures and the exact details of the government’s investment incentives.

For example is the five per cent corporate income tax reduction (per year) lasts for up to six years. The exact length of this tax allowance depends on the amount that is invested by the company. Meanwhile, it also includes lower income tax requirements for a dividend.

Another reason why there have been no investors applying for these incentives could be due to the degree of legal certainty, which is rather low in Indonesia, and therefore investors are unsure a government’s promise that is made now will be kept in the future, especially in case a new government arrives after the general election.

For example, when the government announced the New Mining Law in 2009, it was basically a breach of existing contracts in the mining sector and particularly made the mining business difficult (and unappealing) for foreign investors.

However, the incentives will give positive sentiment to the rating upgrade in the future.

Kim Eng Tan, Senior Director for the Sovereign Ratings Standard and Poor’s (S&P) outlined Indonesia’s sovereign rating outlook is quite positive, supported by the government’s improvement in making investors a lot more confident.

“The government has made some improvements over the years, but if you look at the fiscal number, the deficit is wider,” he said, adding the government should address the State Budget gap deficit issue by accelerating tax reform agenda.

Investments in 2017 reached Rp692 trillion, representing an increase of 13.1 percent from Rp612 trillion worth of total direct investment in the previous year.

Email: elisa.valenta@theinsiderstories.com