Weak Tax Revenue Indonesia in 1H-2016, Spotlight on Tax Amnesty

A 40.2 percent (y/y) decline occurred in tax revenue collection from the oil and gas sector as Indonesia's export performance has been curtailed by low commodity prices. However, the government's overly ambitious tax revenue target that was set in the 2016 State Budget is also to blame for the poor performance so far this year. Despite the sluggishly growing domestic economy and persistently low commodity prices, the government eyed a big jump - around 30 percent (y/y) - in tax income (from realization of IDR 1,055.6 trillion in full-year 2015). Although targets have to be set high in order to keep everyone on their toes, it is also important to set realistic targets as this boosts confidence in Indonesia's public financial management.

Given the weak tax revenue data so far this year - and no major changes detectable in the (forecast for the) domestic and global economies - the government seems to be highly dependent on the tax amnesty program in order to boost tax income to an acceptable level this year. This is quite risky as it remains very difficult to estimate the exact amount of funds that are to be declared and repatriated through Indonesia's tax amnesty program (as well as the additional tax income that will be generated).

According to the government, some IDR 165 trillion (approx. USD $12.6 billion) in additional tax revenue will be generated through the tax amnesty program, an amount that would ease ongoing pressures on the government's budget deficit, which is now becoming closer and closer to the legal limit of 3 percent of gross domestic product (GDP). Breaching this ceiling could cause political instability in the relatively young democracy (it would be the first time that the legal limit is breached in modern history and therefore it remains somewhat uncertain what would happen). However, it is more likely that the government will sharply cut spending before the legal limit is reached. This would be a setback for those that eagerly await rising government-led infrastructure development across the country because the infrastructure budget may be one of the first victims in case of any spending cuts.

Indonesia's Tax Collection Target and Realization 2008 - 2015:

	2008	2009	2010	2011	2012	2013	2014	2015
Target (in IDR trillion)	534.5	597.5	661.4	878.7	885.0	995.2	1,072.4	1,294.3
Realization (in IDR trillion)	607.4	563.2	650.0	872.6	835.3	916.3	985.1	1,055.6
Balance (in IDR trillion)	72.9	34.3	11.4	6.1	49.7	78.9	87.2	238.6

^{Source: Bisnis Indonesia}

Renowned institutions such as Moody's Investors Service and Morgan Stanley have also released positive feedback concerning Indonesia's tax amnesty program. Personally, I remain skeptical - for the moment - about the big capital inflows that are expected to be generated by the program. The program is based on tax evaders' trust in government promises of legal certainty and immunity from prosecution. However, such confidence should be relatively low in a country where policy flip-flops are common.

Meanwhile, legal activists in Indonesia, gathered within the One Justice Foundation (in Indonesian: Yayasan Satu Keadilan) and the Indonesian People's Struggle Union (in Indonesian: Serikat Perjuangan Rakyat Indonesia), are trying to block the tax amnesty program. On Wednesday (13/07) these activists filed for a judicial review at Indonesia's Constitutional Court claiming that the program will turn money laundering practices into legal practices, it protects criminals, teaches (faithful) Indonesian citizens not to pay taxes, and - more generally - constitutes an unfair program from a social point of view.

A preliminary hearing is expected to be conducted within 14 days. Although it is unlikely that Indonesia's Constitutional Court will rule in favor of the legal activists, the judicial review could scare off some potential participants who now may want to think twice before joining a controversial program (the controversial nature could be regarded a flaw with respect to legal certainty). On the other hand, confirmation from the Constitutional Court may in fact ease their minds and give them more certainty.

Indonesia's tax amnesty program is a nine-month program (July 2016 - March 2017) that offers tax incentives to those (former) tax evaders who are willing to declare and - if wanted - repatriate their offshore assets. Recently, Indonesia has been preparing investment instruments in order to absorb excessive liquidity in Indonesia's financial markets that could occur in case the program is a success.

This article was written by R.M.A van der Schaar, the Managing Director of Indonesia Investments. He obtained his Masters degree in Southeast Asian Studies from Leiden University (the Netherlands) with a major focus on the society, history and linguistics of Indonesia.

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