Global Business Guide Indonesia

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Bahana | Bahana Securities Analysis: Economic Stimulus Package No. 7

On 4th December 2015, the government announced its seventh economic stimulus package, aiming to provide incentives for labour-intensive industries, ease certain land-certification processes and reaffirm the existing investment (BKPM) policy for a 3-hour business permit process.

At this stage, the government continues to cut several tax rates, undermining its tax revenue collection as we head into 2016. The announced tax cuts are:

  1. Employees who make up to 50 million IDR per annum in companies with more than 5,000 employees and export at least 50% of their sales would see 50% added personal income tax cut for the next two years, with possible enhancements. This measure is meant to put more money in consumers’ pockets, following a previous measure to allow for higher non-taxable income from 24 million IDR to 36 million IDR. However, we see the impact of this policy action to be minimal raising annual labour income by just 0.7% in 2016 or 1.87% in total (together with higher non-taxable income to 36 million IDR).
  2. For five industries (i.e. shoes, sports shoes, field-engineering shoes, textiles & garments and leather apparel), there is a new measure to allow for 5% lower tax when investing in Indonesia over the next 6 years. Additionally, the loss carry forward (loss compensation) period is being increased to 10 years from 5 years. Separately, there is also lower dividend tax to 10% from 20% previously, also being implemented for overseas companies.

The new economic package also simplifies the process for obtaining 5-year building permits for street vendors. Owners of street vendors on state owned land can use the building’s rights as collateral for subsidized micro loans (KUR).

This is a positive move, as during periods of downturn and high unemployment, more people are joining the informal economy. That said, implementation is likely to be difficult as this is the first measure to address these types of businesses.

The above-mentioned measures should help to provide a basis for economic recovery, with tax cuts and allowances becoming major parts of the stimulus. These should help our estimate for a GDP growth recovery to 5.1% in 2016. However, the latest tax measures are not supportive of tax collection, in our view, as slower economic growth periods typically lead to lower tax revenues.

As of 11M15, tax collection amounted to only 806 trillion IDR (27th November) while customs & duties fees reached just 140 trillion ID, resulting in tax, customs & duties revenue of 946 trillion IDR (64% of the government’s target, 88% of Bahana’s target).

Thus, we expect the 2015 budget deficit to represent 2.7% of GDP and remain at the 2.7% level in 2016, as we continue to expect 300 trillion IDR of tax shortfall next year. In 2016, we look for growth support to come from stimulus measures instead of government spending.