Indonesia’s parliament will vote on a major tax reform by Reuters

Reuters File Photo: Seats in the main assembly room of the parliament building are mostly left vacant because attendance is limited due to limited attendance by the Indonesian prince during the annual State of the Nation address to prevent the spread of coronavirus outbreak (COVID-19).

Written by Gayatri Suryo

JAKARTA (Reuters) – Indonesia’s parliament will vote on Thursday on whether to support government proposals for one of the country’s most ambitious tax overhauls, including raising the VAT rate, repealing a new carbon tax and planned corporate tax cuts.

After the Covid-1 pandemic epidemic hit state funds last year, the government said the tax harmonization bill was aimed at optimizing revenue collection, while ensuring a fair tax system.

But some business groups and analysts have questioned the timing of the planned tax hike, seeing the economic recovery from the epidemic still fragile.

According to a copy reviewed by Reuters, the bill calls for an increase in the VAT rate on sales of almost all products and services from 10% to 11% and by 2025 to 12%.

This will keep the corporate tax rate unchanged at 22%, compared to the previous plan to make it 20% last year. Other measures in the bill include higher income tax rates for the rich, lower income taxes for most people, a new carbon tax and a new tax waiver program.

Parliament’s Finance Commission approved the bill last week. Parliament usually follows the approval of the commission.

The government has made some concessions from its original proposal. Initially, it tried to increase VAT to 12% at once. It also dropped plans to impose a minimum tax on affected companies on suspicion of tax evasion.

Mirdal Gunarto, an economist at Maybank Indonesia, said the changes from the original proposals were positive for the public’s financial and economic recovery.

“The impact of the phased change in VAT will not be too much on inflation … and tax cuts could give some space to increase human consumption,” he said.

City economist Helmi Arman said the measures could help the government achieve higher revenue next year, reduce the revenue deficit and help the authorities reduce the budget gap to 3% of GDP in 2023.

However, some business groups, such as the Shopping Mall Operators Association, have called on parliament to delay raising VAT to wait for the people to restore their purchasing power.

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