Indonesia Plans to Adjust Non-Taxable Income to Local Minimum Wage
Indonesia's tax authorities are planning to revise the non-taxable income regulation again in an attempt to improve the nation's low tax ratio. Last year the government of Indonesia raised non-taxable income by 50 percent from IDR 36 million (approx. USD $2,700) to IDR 54 million (approx. USD $4,060), per year, in a bid to strengthen people's purchasing power and encourage household consumption. However, considering local minimum wages vary across the country's 34 provinces, the nation-wide non-taxable income level of IDR 54 million causes some problems.
Ken Dwijugiasteadi, Taxation Director General at Indonesia's Finance Ministry, said the government therefore wants the level of non-taxable income to depend on the local minimum wage that is set per province. Currently, there is one figure for non-taxable income that applies across Indonesia. However, this means tax revenue realization in certain provinces plunged rather drastically as many people fall into this non-taxable income category (due to lower local minimum wages).
Growth of Indonesia's Non-Taxable Income:
| 1984 | 1995 | 2001 | 2005 | 2006 | 2009 | 2013 | 2015 | 2016 | |
| Non-Taxable Income (in IDR million, per year) |
0.96 | 1.72 | 2.88 | 12.0 | 13.2 | 15.8 | 24.3 | 36.0 | 54.0 |
Source: Bisnis Indonesia
This also mean Indonesia's tax ratio remains very low. Dwijugiasteadi added Indonesia's tax ratio is currently only 10.3 percent of gross domestic product (GDP), trailing far behind regional peers such as Thailand, Malaysia and the Philippines. It is important for Indonesian authorities to improve the tax ratio because tax revenue (including customs duties) accounts for around 85 percent of total government revenue and it therefore forms the backbone of government spending.
By reforming the tax system (including the tax amnesty program that ran between mid-July 2016 and 31 March 2017) Indonesia wants to enlarge the tax base, thus targeting to boost the tax ratio to 11-12 percent by 2018 and then to 16 percent in 2019. Although this may be a too ambitious target, recent steps - such as Indonesia's participation in OECD's Automatic Exchange of Information (AEOI), an initiative for tax information exchange among 100 jurisdictions designed to reign in tax evasion across the world - and additional agreements with Hong Kong and Singapore to share taxpayers' data will certainly help to achieve the targets.
Indonesian Minimum Wages (Monthly) per Province:
| < IDR 1.50 million |
IDR 1.50 - 1.75 million | IDR 1.75 - 2.0 million | IDR 2.00 - 2.25 million | IDR 2.25 - 2.50 million | IDR 2.50 - 3.00 million |
> IDR 3.00 million |
| West Java | Bengkulu | North Sumatra | Jambi | Aceh | Bangka-Belitung | Jakarta |
| Central Java | West Nusa Tenggara | West Sumatra | Central Kalimantan | Riau | Papua | |
| East Java | East Nusa Tenggara | Lampung | Gorontola | South Sumatra | North Sulawesi | |
| Yogyakarta | Banten | West Sulawesi | Riau Islands | |||
| West Kalimantan | Southeast Sulawesi | South Kalimantan | ||||
| Bali | East Kalimantan | |||||
| North Maluku | North Kalimantan | |||||
| South Maluku | West Papua | |||||
| Central Sulawesi | South Sulawesi |
Source: Bisnis Indonesia