Two Sides of the Planned Revision
Revision to the General Provision of Taxation Procedures Law will change a number of tariff and tax collection schemes. It presents a dilemma between the need for state income and potential adverse impact on the economy.
NOT all the contents of the General Provisions of Taxation Procedures (KUP) Bill is seen in positive light by the business community. As business owners impatiently wait for another tax amnesty program due this year, they are becoming concerned over some changes to the provisions on value-added tax (PPN) and income tax (PPh).
Increasing the PPN tariff, said Indonesia Chamber of Commerce and Industry (Kadin) Deputy Chair for Trade Affairs Benny Soetrisno, may place burden on end consumers who pay the final price. Benny, who is also the commissioner of Asia Pacific Investama, reminds that household consumption has always been the largest contributor to the gross domestic product (GDP). “It means this goes against the government’s plan in the effort to increase economic growth,” said Benny to Tempo on Saturday, May 29.
A similar concern is voiced by Indonesian Retail Association Chair Roy Nicholas Mandey. Roy, the Vice President Commissioner of Matahari Department Store, said that tariff hike will increase the selling price of goods and services. He worries that it will weaken the public’s purchasing power, further aggravating the performance of the retail industry, which still recorded negative growth in the first quarter. “The end of the Covid-19 pandemic remains unknown, and mobility restriction may continue on,” said Roy on the factors that have already been troubling the association members
Prepared by the government and the House of Representatives (DPR), the KUP Bill does not only regulate the second tax amnesty program that recently sparked debates. It also contains article changes, including erasures and additions, to the Law No. 8/1983 on value-added tax of goods and sales tax on luxury goods. Law No. 7/2983 on income tax is also subject to revision.
On a number of occasions during the last month, Finance Minister Sri Mulyani Indrawati has revealed the planned increase to VAT and income tax. Minister Sri mentioned VAT increase as one of the means the government will take to boost state revenue next year.
In the latest development, Sri Mulyani also announced a particular change to income tax provision concerning high-income individuals with a taxable income of more than Rp5 billion annually. “The increase is not too high, from 30 percent to 35 percent. This only applies to those who earn more than Rp5 billion of income per year. There are not too many of them,” said Sri Mulyani during a work meeting with the DPR Finance Commission on May 24.
Indeed, higher fiscal burden awaits in 2022. The government aims to suppress budget deficit next year to below 5 percent, between 4.51 to 4.58 percent of GDP. This year, budget deficit is expected to reach 5.7 percent of GDP due to the large amount of state spending, related to the Covid-19 pandemic mitigation and national economy recovery efforts in particular.
State expenditure in 2022 is projected to be between Rp2,630.6 to 2,776.6 trillion. In order to meet the deficit target of less than 5 percent of GDP, state income will need to reach at least Rp1,823.5 to 1,895.4 trillion.
Among the income components, tax revenue is expected to contribute between Rp1,499.3 to 1,528 trillion, representing a 5.8 percent increase compared to the budget target this year of only Rp1,444.5 trillion.
REVISION to the Law on Value-added Tax of and Sales Tax on Luxury Goods becomes one of the most crucial issues in the KUP Bill. Value-added tax is levied on transactions of goods and services by individuals or business entities. The VAT is paid by end users or consumers. Provider of the corresponding goods or services is responsible for collecting, depositing, and reporting the payment by consumers to the tax authority.
Changes to the VAT provision is prepared in Article 44E of the draft of the General Taxation System Bill. Article 7 of the Law on VAT and Luxury Goods mentions an increase in tariff, from 10 percent to 12 percent. As with the previous law, the tariff may be changed to as low as 5 percent or as high as 15 percent. The difference lies in another provision stating that the tariff change will need to be regulated through government regulation after being submitted to the DPR to be discussed when formulating the state budget plan.
The government is not only planning to change tariffs. There is also the new article 7A concerning the imposition of VAT with different tariff than in Article 7. The tariffs range from as low as 5 percent to as high as 25 percent. This different tariff is to be imposed on deliveries of certain taxable goods and services, imports of certain goods, and utilizations of intangible goods and services from outside of the customs area. These certain goods and services will be defined in the government regulations.
This is what the government’s plan of changing VAT provision from single-tariff to multi-tariff means. The finance ministry, particularly its taxation directorate-general, had expressed the intention of implementing the multi-tariff VAT scheme several times. Later on, during the meeting with the DPR Finance Commission on May 24, Minister Sri Mulyani reiterated the importance of the new VAT scheme. “We see that VAT becomes very important from the perspective of justice, or the number of sectors to which it should not or should be levied on,” she said.
Sri Mulyani elaborated further on the sense of justice that she meant. Higher VAT may be imposed on transactions of certain goods and services such as luxury goods, and vice versa. “The reform in taxation is designed to create justice and equality,” she said.
Meanwhile, regarding income tax, the General Taxation System Bill changes article 17 of the Income Tax Law. One most apparent change comes in the form of an additional tier of taxable income. Individual taxpayers are currently categorized into only four tiers of taxable income with tariffs between 5 to 30 percent. In the General Taxation System Bill, the government adds one more tier for individual taxpayers with more than Rp5 billion of annual income. Those in this new category will be subject to a new income tax rate of 35 percent.
On the other hand, the tariff for domestic corporate taxpayers and permanent establishments is to be lowered from 28 percent to 20 percent, effective in the 2022 tax year. In the planned change to article 17 of the Income Tax Law, the government also reduces the tax cut for corporations that trade at least 40 percent of their shares in the stock exchange. The issuer is previously eligible for a 5 percent income tax cut. In the General Taxation System Bill, the tax cut is only 3 percent.
HERMAN Juwono cannot yet imagine how the various tax revisions will be implemented. The Kadin Deputy Chair for Taxation Committee said that the industry is still waiting for a definitive calculation scheme in each change of tariff. However, he also said that the business community cannot just reject the government’s policy. “Kadin is a partner of the government. We know that the government needs state income,” said Herman on May 28.
Nevertheless, Herman expressed uncertainties towards the plan for multi-tariff VAT scheme implementation. Different tariffs that depend on the type of goods and services subjected to tax could potentially add to the complications of tax administration records. He said that the inconvenience in multi-tariff VAT collection and reporting may be partly alleviated through the use of digital technology. “But this needs further study and direct testing because it has never been implemented in Indonesia,” he said.
Taxation Director-General Suryo Utomo did not respond to Tempo’s text messages and phone calls to talk about the various planned revisions in the General Taxation System Bill. Taxation Regulation Director Hestu Yoga Saksama said that inquiries to the taxation directorate-general should be addressed to the Counseling, Services, and Public Relations Director Neilmaldrin Noor. However, Neilmaldrin also did not respond to Tempo’s messages and phone calls.
What is clearly apparent is that, throughout this May, the finance ministry has been communicating more intensively with the business community. On May 11, for example, it invited representatives from a number of industry associations under the Indonesian Employer Association (Apindo) to a meeting in the office of the taxation directorate-general in Jalan Gatot Subroto, South Jakarta. Exactly a week later, Apindo organized similar communication through an online webinar involving around 100 associations. “Not specifically talking about the increase, but exchanging ideas. Discussing the taxation policy,” said Finance Ministry special staff member Yustinus Prastowo on May 29.
Amid the plan to discuss the KUP Bill, a study by the Institute for Development of Economics and Finance (Indef) mirrors the concerns of Benny Soetrisno and Roy Nicholas Mandey. By Indef’s calculation, an increase to the single-tariff VAT from 10 percent to 12.5 percent may cause public consumption to contract by 3.32 percent. On the other hand, export and import performance may also decrease, by minus 0.14 percent and minus 7.02 percent respectively. In turn, gross domestic product may shrink by minus 0.11 percent. “The impact to economy is adverse,” said Indef Executive Director Taufik Ahmad on May 29. “There will be deflation due to lower demand for goods, and state revenue may decline.”