HANGZHOU, China: The main goals of Indonesia’s new tax programme are to widen the tax base and restore confidence, said Finance Minister Sri Mulyani Indrawati, who added that she will take on a “pragmatic” approach to hasten the slow progress observed during the first month of implementation.
In an interview with Channel NewsAsia on the sidelines of the G20 Summit in Hangzhou, she said: “The objective of this tax amnesty is actually more on creating confidence back. So it’s rebuilding trust and expanding the tax base... so that Indonesia, as a big economy in the world, has the ability to manoeuvre.”
Ms Sri Mulyani added that while the amount of money that the new scheme aims to recover is crucial, the most important point is for taxpayers to realise that tax will need to be mobilised in a “much more professional (and) consistent” manner based on good governance “in order for us to build the country”.
Officially kicked off on July 18, the landmark tax amnesty programme is Indonesia's latest attempt at reforming its tax regime as it seeks to boost tax revenues. It is designed to encourage wealthier Indonesians to repatriate some of their undeclared assets. The programme will run until March next year, with penalties on repatriated funds beginning at as low as 2 per cent, before progressively rising after September 30, 2016.
But the finance minister, who took over from Bambang Brodjonegoro in a cabinet reshuffle announced by President Joko Widodo in July, admitted that it will be no walk in the park to get people to pay up.
She noted that the number of active taxpayers in the populous country of 250 million is no more than 1.2 million people. “The activity, in this case, is very narrow and there are a lot of exemptions,” she said.
True enough, the new programme saw slow progress in its first month, bringing in only US$3.2 billion of declared assets, a tiny fraction of the US$302 billion the government hopes will go into state coffers.
But Ms Sri Mulyani, who gained a reputation as one of Indonesia’s most important reformers during her first stint as finance minister during 2005 to 2010, said she will “be very pragmatic” and will seek to communicate “with all stakeholders… to achieve results”.
“This law definitely needs a lot of explanation (and) a lot of regulatory to implement the law (was only) completed last week because we really need to look at what (was) exactly required for those taxpayers to bring the money back,” the 53-year-old told Channel NewsAsia, adding that the ministry has begun work “at full speed beginning this September”.
CUT IN CORPORATE TAX RATE NOT ENCOURAGING RACE TO THE BOTTOM
Meanwhile, the biggest economy in Southeast Asian is also mulling cutting its corporate tax rate from 25 per cent to 17 per cent, in order to better compete with neighbouring countries with lower tax rates such as Singapore, and draw in more investment.
Regarding that, Ms Sri Mulyani denied plans to lower the country’s tax rate will encourage a race to the bottom among countries. “Our rate is not extremely high or extremely low in this case… We are not going to encourage (countries) to race to the bottom in terms of the rates because it is just unfair for all countries to compete based on rates.”
Instead, the former managing director of the World Bank described it as an important step amidst Indonesia’s tax overhaul.
“We will look at all options, including the tax rate, (on) how we (can) improve the tax administration and how we can provide incentives which is still according to the best practices of the world, without creating a distortion domestically for us,” Ms Sri Mulyani said.
“It is not just about adopting tax as low as possible in order for you to be attractive, but we have a much deeper problem which we really need to solve and that is through tax reform and improving the governance of the tax administration… I think that is going to be the focus that I am going to (take) in order to translate the President’s idea (of having an) open and competitive (economy), and improving the productivity of the people.”
Plans for a tax cut come as President Joko Widodo’s government is falling short of its revenue collection targets, putting its 2016 budget spending plans and an ambitious infrastructure rollout program at risk.
When asked what funding options Indonesia has, Ms Sri Mulyani said the estimated cost of US$210 to US$250 billion for the various infrastructure projects will not be borne entirely out of the government’s own purse.
“I think Indonesia is dividing very clearly. 60 per cent (will) come from the private (sector) while another 24 or 25 per cent is coming from the state-owned enterprises and that’s why the rest is going to be how the government (will play) a more catalytic role through the regulatory framework… to address the infrastructure (needs).”
G20 LEADERS TO DO MORE AMBITIOUS REFORMS
Amid global challenges exacerbated by Britain’s decision to exit the European Union, the world's leading economies pledged to do more to lift global growth and share the benefits more broadly at the previous G20 Summit held in July in China’s southwestern city of Chengdu.
But Ms Sri Mulyani believed that there’s a need to press harder for all global leaders to embark on a more ambitious reforms.
“This is different from reacting or responding to (a) crisis in which you actually try to do the counter cyclical by pumping more money or do the deficit fiscal policy. This is going to be a much harder homework, and that’s why you really have to be matched with the level of ambition by the leaders, including taking a political hit,” she said, raising the example of labour or infrastructure reforms where results will not happen overnight.
She also noted that Indonesia has progressed in terms of structured reforms, paving the way for a pick-up in growth rate in the second quarter.
“So there is really a mismatch between the result and the decision, which is sometimes painful today and (the) gain is only going to be active in the medium to long term… I think in the G20 it is also the same… Lowering the interest rate (and) pumping more money is easy language. Structural reform is always very complicated politically (so) it will take a little bit more effort,” Ms Sri Mulyani told Channel NewsAsia.