Tax incentives are implemented to give taxpayers and investors direct benefits to take a particular action. This is widely seen for governments to encourage companies to invest and develop infrastructure in Indonesia.
Tax incentives are particularly important in Indonesia under President Joko Widodo’s governance, with an effort to boost Indonesian economy through investments.
In addition, tax incentives have long been a mean for countries to enhance productivity and rapid economic growth. They involve cutting taxes in exchange for operations or implementations that will benefit the economy in the country.
Countries such as Malaysia, Ireland, Taiwan, Singapore, and Korea are the popular adopters.
Reasons of Unattractive Tax Incentives in Indonesia
In 2017, a variety of tax incentives, such as tax allowances and tax holidays, were offered by the government in Indonesia for investors.
Among the many industries in Indonesia, investments in trailblazing industries such as oil and gas sector, metal production, telecommunication, agricultural processing, manufacturing industries in special economic zones, and marine transport, are strongly encouraged by the government through tax incentives.
However, the response was weak, and not a lot of investors seemed to be flattered with the government’s effort—as almost nobody applied for it last year.
Why are they so unattractive?
Indonesian Deputy Finance Minister Mardiasmo has said that confusing procedures and bureaucratic regulations are the culprits behind the seem-to-be unappealing tax incentives.
Besides, a low degree of legal certainty from the government is also the reason many investors are on the fence—a legitimate tax incentive now might become invalid later, especially after the election—making it increasingly difficult for Indonesia to stimulate the desire economic investments.
Four Planned Fiscal Incentives
Tax revenue is the foundation of state revenue in Indonesia, with a contribution of 85.4 per cent. Therefore, a competitive tax incentive must be a big part of the reform effort.
Finance Minister Sri Mulyani Indrawati mentioned that in the act of drawing more investments, a considerable amount of regulations are undergoing revision to provide a more enticing incentive package for people who are interested in investing and doing business in Indonesia.
Currently, there are four planned incentives in place in the form of tax holidays, tax allowance, tax deductions for small and medium enterprises, and tax incentives for companies with research and development activities.
Sri Mulyani announced that government would increase the number of sectors qualifying for the incentives, including tax deductions. Along with the recommendations from various ministries, this expansion of business sectors is based on the direction of the President.
Business sectors that will secure the tax allowance will be informed after the revision.
The Indonesian government will offer income tax deductions 10 through 100 per cent.
Tax Reductions for SMEs
Upon the revision of Financial Ministerial Regulation No 250/1995, small and medium enterprises will be eligible for tax deductions.
Income Tax Deductions
Last but not least, businesses carrying out research and development activities are qualified to apply for a tax deduction of a maximum of 200 per cent.
According to Sri Mulyani, many problems still exist, making investors extremely cautious of investing their money in Indonesia—issues such as raw material shortage and labour affairs.
She further emphasised that the Indonesian government needs to review and make adjustments to the present tax incentive structure, in order to improve the investment environment in Indonesia. A simpler procedure without the lengthy process for investors to acquire the tax incentives is also part of the reform in an effort to elevate investor’s confidence.
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