Indonesia to Raise Non-Taxable Income by 50% in 2016

On 1 January 2015 the Indonesian government had already raised non-taxable personal income by 48 percent to IDR 36 million through Finance Ministry Regulation No. 122/PMK.010/2015 regarding the Adjustment of Non-Taxable Income. Indonesia's Tax Directorate General (in Indonesian: Direktorat Jenderal Pajak) informed earlier that this move was partly responsible for a 7.15 percent year-on-year (y/y) increase in tax collection to IDR 1,055.6 trillion (approx. USD $80 billion) in 2015.

By implementing more fiscal stimulus (raising the non-taxable income again), the government of Indonesia aims to further boost tax collection (which is still very low, reflected by the nation's weak tax-to-GDP ratio at hardly 12 percent, due to weak tax compliance as well as weak law enforcement), particularly as there has been a delay in the implementation of the Tax Amnesty Bill. However, we remain sceptical that Indonesia's 2016 tax revenue target (set at IDR 1,360 trillion) can be achieved as this would imply a 28 percent (y/y) jump from tax revenue realization last year. Such a growth rate would require much more structural reforms at the tax office. Tax collection realization in 2015 only reached 81.6 percent of the government's tax revenue target set in the 2015 State Budget, a rather poor performance on paper (which was primarily caused by an overly high tax revenue target). Although it is good to be ambitious, the Indonesian government should also focus on realistic calculations in order to enhance credibility.

Indonesia's Tax Collection Target and Realization 2008-2016

	2008	2009	2010	2011	2012	2013	2014	2015	2016
Target (in IDR trillion)	534.5	597.5	661.4	878.7	885.0	995.2	1,072.4	1,294.3	1,360.1
Realization (in IDR trillion)	607.4	563.2	650.0	872.6	835.3	916.3	984.9	1,055.6

^{Sources: Direktorat Jenderal Pajak & Nota Keuangan}

Indonesian Finance Minister Bambang Brodjonegoro informed that the government's latest non-taxable income hike proposal was well-received by Indonesia's parliament. Therefore, it could be implemented as early as June 2016 and it will be applied retroactively (from January 2016).

Depending on the income figure, personal income tax rates in Indonesia range between 5 and 30 percent. The newly proposed non-taxable income level at IDR 54 million implies that those Indonesians who have a monthly income below IDR 4.5 million (approx. USD $341) will not have to pay personal income tax (which is the lower middle income segment). This should strengthen people's purchasing power as well as household consumption. As a result industries should also start to grow again (multiplier effect). The new proposal may also be a sign that the Indonesian government acknowledges that curbed household consumption has been one of the key factors that explains Indonesia's slowing economic growth in the period 2011-2015. Household consumption is the key pillar of support for Indonesia's economic growth, accounting for 55.9 percent of total GDP in 2015, and therefore any weakness in household consumption will have a direct and major impact on overall economic growth of Indonesia.

Tax Revenue Indonesia in 2015 & 2014:

	2014	2015
Tax Oil & Gas Tax (PPh Migas) (in IDR trillion)	87.5	49.7
Non-Oil & Gas Tax (PPh Non Migas) (in IDR trillion)	458.7	547.5
VAT & Luxury Tax (PPN & PPnBM) (in IDR trillion)	409.2	423.5
Land & Building Tax (PBB) (in IDR trillion)	23.5	29.4
Other Tax (in IDR trillion)	6.3	5.5

^{Source: Indonesian Finance Ministry}

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