JAKARTA -- The Indonesian government is gearing up to increase its COVID-battered state revenues by raising its value added tax and introducing other levies as part of an overhaul of a tax system that has failed to register a large majority of Indonesians.
A draft of the bill seen by Nikkei Asia proposes that the carbon tax rate be set according to carbon market pricing, with a minimum rate of 30 rupiah (less than 1 cent) per kilogram of CO2 equivalent.
Individuals and entities that "buy goods containing carbon and/or carry out activities that produce carbon emissions" must pay the carbon tax, the draft bill says. It adds that revenues collected "can be allocated" for measures to curb climate change.
The bill does not indicate a timeline or when the carbon tax would be implemented. Further details are to be filled in by the government and ministerial regulations, it says.
Indonesia recently pushed forward its goal to reach net-zero emissions to 2060, a decade sooner than previous plans. In this respect, the carbon tax is an incentive of sorts, meant to make carbon-intensive activities and products more expensive and thus nudge the economy toward a less polluted future.
Other tax changes laid out in the bill include an increase in the VAT from 10% to 11% starting on April 1, and to 12% before Jan. 1, 2025. It also proposes a 35% personal income tax rate for those earning more than 5 billion rupiah (about $350,000) per year. Indonesia currently has four brackets for personal income tax, ranging from 5% to 30%.
The government is also looking to relaunch its tax amnesty program, a repeat of a similar 9-month plan in 2016-2017. The program will run for a shorter period, from Jan. 1 to June 30, 2022.
Indonesia has long struggled with its tax system, especially compared to its regional peers. The archipelago's tax-to-gross domestic product ratio was 11.9% in 2018, demonstrably lower than in Thailand and the Philippines. It also remains well below the OECD average of 34.3%.
Indonesia has 270 million people, only 38.7 million of whom were registered as taxpayers in 2019.
The government has failed to hit its tax revenue target in each of the past three years, including in 2020, when it needed to boost spending to tackle COVID-19 and made social assistance payments. Indonesia's tax revenue for 2020 was 1.285 quadrillion rupiah, 16.8% less than a year earlier. The government is expecting 1.404 quadrillion rupiah in tax revenue this year, 9% below 2019 figures.
With the government needing to return to its fiscal deficit cap of 3% to GDP in 2023, Jakarta needs additional revenues if it is to balance its books. In the 2022 budget approved by parliament on Thursday, the government expects a fiscal deficit equal to 4.85% of GDP. The ratio was 6.14% in 2020 and is expected to be 5.7% in 2021.
President Joko "Jokowi" Widodo has an overwhelming majority in the parliament, which should make it easier for the government to pass the tax overhaul. However, "Jokowi's large coalition has mixed views on the bill, so the president will probably water down or scrap some measures to ensure passage by the end of 2021, reducing the potential revenue gains," said political risk consultancy Eurasia Group in a recent memo.
"If negotiations delay approval until 2022," the memo went on, "then the impact on fiscal plans would be even greater. As a result, the administration remains unlikely to fulfill its commitment to reinstate the 3%-of-GDP fiscal deficit cap in 2023."
Additional reporting by Ismi Damayanti