JAKARTA - Indonesia’s long-awaited tax amnesty bill is currently being debated at the House of Representatives with hopes that it could be passed as early as June and before the parliamentary session ends in July. The move will pave the way for repatriation of funds back into Indonesia and groundwork to prepare for the inflows have begun.
There are reports that the government is preparing special non-tradable bonds to absorb the inflows and five financial institutions including three state banks will be appointed as investment managers of the repatriated funds.
The tax amnesty bill has significant impact on the government’s ability to meet its revenue and budget deficit target for 2016. Based on data from the Finance Ministry, Indonesia has only met around 20% of its tax collection target in the first four months of the year, with Rp 283 trillion (US$21 bn) collected and this was also 8.4%lower than Rp 309 trillion collected in the same period last year as tax-payers held back payments due to the uncertainty. The revision of the 2016 Budget which was approved in October last year, has been held back until more clarity on the bill. Without the additional revenue from the tax amnesty, growth could be compromised as a result of revenue shortfall with cutbacks expected in some government expenditure and infrastructure spending.
How Much Additional Revenue Can The Tax Amnesty Bill Generate?
The bill proposes a 1-3% tax tariff if the wealth is repatriated or 2-6% if they are declared but not repatriated. There is significant difference in the estimates from Bank Indonesia (BI) and the Ministry of Finance on the additional revenue that could potentially arise from the tax amnesty bill this year, ranging from US$4 bn to US$12 bn or 0.5%-1.4% of GDP. The government recorded a fiscal deficit of 2.8% of GDP in 2015 and the deficit could rise to 3.0% of GDP this year despite budgeted 2.2% as a result of the revenue shortfall. We believe the additional revenue will help ensure that the government will be able to continue with the planned infrastructure projects this year.
Over time, the government hopes that the move will help to broaden the tax base. Finance Minister Bambang Brodjonegoro previously estimated that only 900,000 individuals pay taxes compared to 27.6 mn registered taxpayers and 114.8 mn employed in Indonesia. From the experience of the Sunset Policy in 2008, the tax-to-GDP ratio rose to 13.3% in 2008 but failed to be sustained and has since dropped to 10.7% in 2015. The repatriated portion of the declared wealth will likely have further positive impact on the economy in terms of liquidity and future income potential. The Finance Ministry estimated that the repatriated portion to be around Rp 1,000 trillion (US$76 bn) or about 20% of the total that will be declared. (*)