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Editorial: Lowering income tax rates
Tue, 07/22/2008 10:14 AM | Opinion
Indonesia's new income tax law, which is scheduled to be approved by the parliament next month, will significantly reduce tax rates and simplify the rate structure.
This is really a win-win situation for both the government and taxpayers because the experiences of most other countries have shown that tax reforms that make it easier for taxpayers to pay taxes and reduce the costs of compliance can increase government revenues by broadening the tax base.
Personal income tax rates will decrease from five to four layers, with the highest level down from 35 percent to 30 percent, which is applicable to an annual income of more than Rp 500 million (US$53,500). Under the current rate system, a personal income of more than Rp 200 million is already subject to the highest rate at 35 percent.
Even though the rate structure will be simplified from five to four progressive rates (5, 15, 25 to 30 percent), this structure is still considered effective in fairly distributing the tax burden across different income brackets.
Tax allowances for low income people will increase by more than 15 percent because the maximum income exempted from tax will rise from Rp 13.2 million to Rp 15.8 million (US$1,690) a year for a single taxpayer and from Rp 18 million to Rp 21.04 million a year for a married taxpayer.
There is even better news for the business sector. The structure of corporate income tax rates will be simplified from three layers at present to a single rate of 28 percent in 2009 and 25 percent in subsequent years for big companies. The gradual rate reduction seems designed to prevent an abrupt fall in income tax receipts during the initial enforcement of the new income tax law.
Micro, small and medium-scale enterprises that already operate as legal entities (already legally incorporated) will get special treatment because their income tax rate will decrease from 15 percent now to 14 percent in 2009 and 12.5 percent, or half of the rate imposed on big enterprises, starting in 2010. This group of businesses is defined as those with annual turnovers of up to Rp 50 billion.
This low income tax rate is specially designed to encourage more micro and small enterprises to operate in the formal economy as legal entities because firms which have not yet run as legal entities are subject to the progressive personal income tax rates.
These lower tax rates and simplified tax structure are only several of the significant changes to be brought about by the new income tax law, which will replace the 2000 income tax law.
Companies which sell a minimal 40 percent of their shares through the stock exchange will get a 5 percentage-point reduction in their income tax burden and the income tax on dividend payments will be halved from 20 to 10 percent. These incentives will certainly encourage more companies to go public. The larger the number of businesses listed on the stock market, the better it will be for the economy and tax collection system because publicly-traded companies are subject to tough disclosure and audit requirements.
The new income tax law will go a long way in broadening the tax base through a higher rate of voluntary compliance, in building a sound and competitive tax system to stimulate investment and enhancing justice in the tax burdens.
Tax Director General Darmin Nasution complained recently that personal and corporate income taxpayers already registered totaled only around 6 million, but of this total only 2.4 million regularly filed annual tax returns. The distribution of tax burdens also has been seen as quite unfair because less than 51,000 of the registered taxpayers usually contribute almost 80 percent of total personal income tax receipts.
The new income tax law is scheduled to be enacted during the next session period of the parliament starting in the middle of next month because the House of Representatives committee in charge of deliberating the bill has reached an agreement on all contentious issues in the bill.
The income tax bill itself is one of the tax reform package proposed to the House in early 2005. The bill on the general rules and procedures of taxation has been enacted, while the draft legislation on value added tax and luxury sales tax is expected to be approved during the upcoming session period.
Critics may be skeptical that a law by itself will not improve things. But we are nevertheless encouraged because the tax reforms are being supplemented with transformational changes in the tax directorate general, in its compensation system and its highly centralized bureaucracies.
