Why It Matters

Jokowi stronger with tax reform

Last week, Indonesian President Joko Widodo finally managed to push through Parliament a landmark tax amnesty plan, which he hopes will create an inflow of billions of dollars to the country.

These are purportedly funds it has lost over decades to widespread tax evasion and in assets hidden overseas by wealthy citizens and businesses. If all goes to plan, the government expects 1,000 trillion rupiah (S$102.7 billion) to be repatriated from overseas and subsequently invested locally. It will also add 165 trillion rupiah to its tax coffers.

This will not only increase the government's revenue by 11 percentage points, but the capital can also be used to pay for infrastructure and developmental projects that Indonesia urgently needs to boost its under-achieving economy.

There were initial concerns that the Indonesian taxman's offer of amnesty and discounted rates for errant taxpayers may lead to an exodus of funds from places like Singapore, where US$200 billion (S$269 billion) in Indonesian wealth is said to be stashed.

Bankers to the rich have since put paid to those concerns, saying the outflow will not be substantial enough to adversely affect Singapore. The city-state's merits - including its status as a corruption-free and stable tax jurisdiction - will mean some will continue to park their wealth there.

Also, taxpayers who come clean under the amnesty are not forced to repatriate the assets they declare, although they will be taxed at double the rate of those who do send their money home.

Economists like Mr Wellian Wiranto from OCBC Bank say Indonesia's tax amnesty Bill makes economic sense. What is worth noting is that it is also the first piece of legislation ratified by a Parliament where Mr Joko has majority support for the first time since he took office in 2014.

So the Bill is also a measure of his growing political strength. But is it a real breakthrough and will more of his reforms be realised? Only time will tell.

A version of this article appeared in the print edition of The Straits Times on July 04, 2016, with the headline 'Jokowi stronger with tax reform'. Print Edition | Subscribe