Parliament's Commission XI on Finance this week approved substantial changes to the country's tax laws, with formal passage of the Bill on Harmonizing Tax Regulations expected next week. The most important part of the legislation in the near term is the VAT increase, as it improves the credibility of the government's plan to raise revenues by 10% next year, and to make substantial progress towards bringing down the fiscal deficit to below 3% of GDP by 2023. And while the carbon tax was less than half of what was in the government proposal, the executive has leeway to increase the rate without going back to parliament.
In summary, the bill's most important provisions include:
- The introduction of a carbon tax that applies to businesses and consumers, at a rate of IDR 30 (USD 0.002) per kilogram of carbon dioxide equivalent. The bill states that the levy will apply to individuals and entities that “buy goods containing carbon and/or carry out activities that produce carbon emissions.” The amount is less than half the IDR 70 originally proposed by the government, but the bill grants the executive the power to change it through a regulation, without need for parliamentary approval. The bill further states that the proceeds should be used for “controlling climate change.” The tax could be imposed first on coal-fired power pants by the middle of next year.
- An increase in the VAT rate from 10% to 11% on 1 April 2022 and to 12% by 25 January 2025 at the latest. However, the “basic needs of the masses” are exempted, such as education, social services, healthcare and domestic land and air transport. A top tier personal income tax rate for those earning more than IDR 5bn (USD 350,000) has been created, effectively raising their rate to 35% from the current 30%. Still unclear is whether the VAT revenue threshold of IDR 4.8bn (USD 336,00) under which small and medium enterprises are exempted from the tax is being amended.
- An amnesty program from 1 January — 30 June 2022 that allows taxpayers to pay a tax of 6%-11% on undisclosed wealth based on earnings from 1985 to 2015. Indonesian whose assets remain out of country will pay the top 11% rate, while those who have invested them domestically in natural resources processing, renewable energy or state securities will benefit from the lowest 6% rate. The middle rate applies to all others. The rate is below the 15% proposed by the government but above the 1% — 4% of the 2016 Tax Amnesty Act. Taxpayers who failed to take part in the 2016 amnesty are still eligible for the 2022 one.