Jakarta. Moody’s Investors Service said Indonesia’s tax amnesty bill, which was approved by legislators in June, is credit positive for the country, as it underscores the government’s continued commitment to reform the nation as well as helping offset the expected lower taxation revenue.
Moody’s in January affirmed Indonesia’s Baa3 sovereign rating, with a positive outlook. The international rating accessor re-instated Indonesia’s rating to investment grade level since 2012.
“The move is credit positive, as it underscores President Joko Widodo’s continued commitment to reform, and marks the first significant step to offset the impact of low oil prices and softening growth on government revenues,” Moody’s said in a statement sent to the Jakarta Globe last week.
“We expect a positive effect on revenues, but the likely uptake rate and the extent of the boost to income cannot yet be reliably estimated, given uncertain global conditions and partly because the bill does not specify enhanced enforcement mechanisms, such as higher penalties for non-compliance,” the rating agency said.
Moody’s cited Indonesia’s weak government revenue as a key constraint to the country’s fiscal strength and overall credit profile.
“At 13.0 percent of GDP [gross domestic product] in 2015, Indonesia’s government revenue is the lowest among investment grade countries. Total government revenue dropped 1.7 percent as a proportion of GDP in 2015, largely due to shrinking oil and gas receipts,” Moody’s said.
Meanwhile, the rating agency also noted there are only about 27 million registered taxpayers out of a population of 255 million, citing the country’s finance ministry estimates.
Of those figure, only 10 million pay income tax in full every year.
The amnesty program, which will run through to March 2017, will allow wealthy individuals to pay a penalty of just 4-10 percent on assets, depending on how soon they declare the assets.
There are also other “generous” punishments for companies or investors who repatriate assets, depending on the size and amount of assets declared. The repatriated funds will need to stay in Indonesia for at least three years and be invested in various financial instruments available in the country.
In dire need of additional state revenue
Moody’s cited the government estimate that the amnesty program is expected to boost state revenue by Rp 165 trillion, or equivalent to 1.3 percent of GDP, by the end of 2016.
“This would give the administration more flexibility to expand fiscal spending to support the economy without breaching its legal deficit ceiling of 3.0 percent of GDP,” Moody’s said.
Last year, Indonesia’s fiscal deficit widened to 2.5 percent from 2.1 percent a year earlier, while the economy expanded just by 4.8 percent, the slowest pace since the global financial crisis. Indonesia is in great need of additional state revenue, of which taxations are key to the country’s income.
Last month, the House of Representatives approved a revised 2016 budget, which raised the target for budget deficit at 2.35 percent of GDP from 2.15 percent in the previous budget assumption.
The new figure already incorporates a lower oil price assumption of $40 per barrel, compared to $50 in the original budget. Furthermore, the administration also need to cut diesel subsidies to Rp 500 per liter from Rp 1,000 starting this month, a further move to continue reducing subsidy spending initiated in late 2014.
The revised budget also accommodates larger the capital for 21 state-owned enterprises to develop infrastructure development.
“Besides boosting revenues, inflows from the tax amnesty will help to protect Indonesia against external pressures, at a time when global capital flows have been increasingly volatile,” Moody’s said.
Sumber: Jakarta Globe
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