Why It Matters

Jakarta's tax cuts a bold gambit

Indonesia's plan to cut the corporate income tax rate by a fifth to 20 per cent represents a bold gambit from planners in the region's No. 1 economy, not known to be the most efficient collector of taxes.

Finance Minister Bambang Brodjonegoro had spoken of trimming corporate and personal income taxes last November. But that he did so again on Monday after meeting the parliamentary commission overseeing taxes - tax laws need legislative clearance - signals the government is pressing on. Now, it's time to start collecting.

The move underscores several things. First, Jakarta is moving to use incentives to win investments and onshore manufacturing, not just dangling the carrot of the region's biggest market. Second, it is trying to see if lowering taxes prods more people and companies to pay their dues - a gamble when, at 194 trillion rupiah (S$19.9 billion), taxes collected in the first quarter of this year were down 2 per cent from the same period last year.

More importantly for the region, the move reflects the growing self-confidence of President Joko Widodo, now 18 months into his term, as well as the clout wielded by his reform-minded adviser, Mr Tom Lembong, who has been elevated to Trade Minister.

Jakarta's challenge to find funds for state spending will not go away, since 70 per cent of tax revenue was allocated for this purpose. Earlier, it had projected tax collections would rise 28 per cent this year.

Mr Joko is gambling that lower company tax will spur business while another proposal, a higher threshold for personal income tax, will boost consumption, feeding back into an economy projected to accelerate to 5.3 per cent growth, from last year's 4.8 per cent.

The months ahead will reveal whether all this will lead the 27 million Indonesian taxpayers to cough up more, and whether more in the nation of 255 million will start paying taxes. This seems ambitious, given that Indonesians are notoriously poor at paying tax.

A version of this article appeared in the print edition of The Straits Times on April 13, 2016, with the headline 'Jakarta presses on with tax cuts'. Print Edition | Subscribe