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Indonesia’s tax overhaul seen a boost


September 11, 2008

Indonesia’s tax overhaul seen a boost
Indonesia's overhaul of its tax system, with improved tax collection and lower tax rates, will boost consumer spending, corporate earnings, investment, and share offerings, Reuters quoted investors and analysts as saying.

Tax revenues in Southeast Asia's biggest economy rose nearly 50 percent in the first eight months of 2008 from a year ago, excluding income tax from the oil and gas sector, as tougher action by the authorities led to improved compliance, the director-general for tax said late on Tuesday.

Indonesia has taken a much tougher stance against individuals and companies over tax payments since 2006, when Darmin Nasution was appointed director-general for tax, in a bid to increase revenues.

Now, with the passing of a new tax law by parliament on September 3, efforts to step up tax collection and tackle widespread evasion should improve further, analysts said.

The new law, which will come into effect next year, provides incentives for people to register as taxpayers, and cuts personal and corporate tax rates, bringing the latter down to 28 percent in 2009 and 25 percent in 2010, from 30 percent currently.

"It will be positive," said Sandiaga Uno, who runs Indonesian investment fund Saratoga Capital.

"The key is now to widen the tax base by registering more firms, small- and medium-sized enterprises especially, and individuals," he added.

Listed companies with a minimum of 40 percent of their shares held by the public will receive an additional tax cut of 5 percent -- a move that is intended to develop Indonesia's financial markets and attract more investors.

"This action will encourage more IPOs in the market, and more placements for companies with public ownership between 30-39 percent," said Ferry Wong, head of research at Macquarie
Securities in Jakarta.

The tax office had estimated it would collect 40.8 trillion rupiah less from companies and individuals next year as a result of the changes, but economists have said that longer-term, the measures will widen the tax net and lead to higher revenues.

"This action may serve the budget well in the long run and

Indonesia will have a much more competitive tax environment to attract investment and create employment," Macquarie's Wong said.

The finance ministry has set a total tax revenue target of 609.2 trillion rupiah for 2008, or about 70 percent of the total budget revenue, and has forecast tax revenue will rise by 19 percent to
723.9 trillion rupiah in 2009.

Tax revenue in August, minus tax from oil and gas, climbed to 46.132 trillion rupiah, from 32.843 trillion rupiah in August last year.

For January-August, tax revenue was 318.74 trillion rupiah, up 46 percent from 218.33 trillion rupiah a year ago.

With its poor infrastructure, Indonesia desperately needs to raise money to build new roads, ports, power stations, and railways so that the pace of economic growth can be maintained.

Indonesia's economy grew 6.3 percent in 2007, the fastest pace in more than a decade, and expanded in the second quarter by a stronger-than-expected 6.39 percent from a year earlier, thanks to strong commodity exports and investment.

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