Global Business Guide Indonesia

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Business Updates | Indonesia Expected to Modify Luxury Tax Regulation

Rising inflation, a weakening Rupiah and general economic downturn have forced Indonesia’s Joko Widodo-led administration to adjust an array of government regulations as a means of spurring domestic consumption and encouraging growth. Among the most recent initiatives is the Ministry of Finance’s proposed plan to modify Indonesia’s current sales tax on luxury goods. Indonesia’s Finance Minister, Mr Bambang Brodjonegoro, has hinted at removing certain goods from the current list of luxury items, which has been used over previous decades to narrow the gap between the rich and the poor. By exempting selected products from the sales tax on luxury goods, the government hopes to turn around the 4.7% economic growth recorded in Q1 2015, the second slowest growth rate since 2009.

Redefining Luxury

The draft bill expected to come into effect before the end of the fasting month is set to exclude selected items such as televisions, refrigerators, washing machines, and sofas from the luxury goods sales tax, though details on the precise category of goods to be exempted are pending. Minister Mr Bambang Brodjonegoro has yet to stipulate on whether the proposed regulation will encompass only imported items or whether it will also include locally manufactured luxury products. Adjusting the tax policy should serve as a boon to a handful of industries able to offer their products at lower prices, particularly given the context of the upcoming Ramadan month well-known for spurring high spending on home improvements amongst Indonesia’s 250 million consumers.

Removing the luxury tax on certain products should have a considerable impact in reinvigorating slumping private consumption, as Indonesia presently imposes sales tax ranging from 10% to 50% under the Ministry of Finance Regulation No.18/2000 on Value Added and Sales Tax on Luxury Goods long considered to be status symbols such as electronics, home appliances, and furniture. The new reality of an emerging middle class comprised of 100 million individuals means that many of these items are now attainable for a large subset of the population, and dictates that previous categorisations for luxury goods be revised. 

Balancing Out Tax Losses

The potential effects of the proposed luxury tax include a decline in state tax revenue which may hinder President Joko Widodo’s 2015 target set at 1.29 quadrillion IDR, a 31.4% increase from last year. As such, the Ministry of Finance has released several policies in order to address this, such as an adjustment to 5% tax on ‘super luxurious’ goods particularly for the real estate industry by lowering the benchmark from 10 billion IDR to 5 billion IDR. In tandem with this regulation, the State Tax Office introduced an amnesty in May whereby citizens who have not completed tax obligations over the past five years are not subject to any penalties or fines granted that the government receives unpaid tax payments from that determined time period. The effort is an additional bid to increase tax revenue which since late May encompasses 28% of the year-end goal.

Moreover, the proposed draft bill on luxury goods is only expected to decrease tax revenue to 800 billion IDR (around $62 million USD) from the previous projection of 900 billion IDR (nearly $69 million USD). This estimate comprises less than 1% of the government’s target and thereby neutralises doubts that the tax policy change will create a large dent for the economy.

Impact on Industries

The World Bank stated that domestic consumption will remain the backbone of economic growth in Indonesia. As such, investors in the consumer goods industry, for example, in electronics, home appliance manufacturing and furniture, can benefit from the opportunities waiting ahead once the list of products waived from the luxury sales tax list is issued (See Electronics and Home Appliances Manufacturing in Indonesia; Finding its Edge). Although 58.3% of total economic growth was derived from household consumption during the first quarter of the year, corporate earnings from retailers in Indonesia have slumped. Companies such as Sharp Corporation which incurred a $1.86 billion USD global fiscal year loss in May have substantial room for profit with a focus on the Indonesian market where televisions, refrigerators, air conditioners and washing machines contribute between 18% - 30% of the company’s local revenue. As compared to developed markets saturated in home appliances, Indonesia’s low penetration level presents huge potential for manufacturers to tap into this particular emerging market (GfK Asia Pte Ltd) as the country’s young population seeks a more luxurious lifestyle.

Indonesia’s middle class consumers warmly welcomed the opening of Swedish-brand furniture manufacturer IKEA on home soil in October 2014 attracting more than 75,000 customers each month (VF Franchise Consulting) capitalising on the young professional market that are moving away from traditional wooden furniture. Investors in the likes of IKEA Indonesia which is currently subject to a 40% luxury tax rate on its products are hopeful that the selling price can be considerably cheaper resulting from the policy adjustments. The leeway provided from the tax policy change enables companies focused on furniture and home appliances to maximise profit earnings while at the same time reaching out to a far broader segment given that the retail price for their products decrease as part of the luxury sales tax alleviation.

A Necessary Approach

Indonesia is expected to face a tough quarter ahead with the holy month of Ramadan approaching, bringing along the looming pressure of high levels of inflation before, throughout, and after the fasting period. Nationwide consumption reached a four-year low of 5% as less than favourable economic conditions cause domestic households to restrict spending. However, Bank Indonesia’s Consumer Confidence Index released earlier this month indicated that local consumers are expecting lower prices in the next six months, which Minister Mr Bambang Brodjonegoro plans to make feasible in stating that the proposed draft bill on luxury goods will pass into regulation before the end of Eid ul-Fitr. To further lessen the squeeze on disposable incomes, the government will also decide on whether to increase the annual income tax threshold for unmarried adults by 50% from 24.3 million IDR to 36 million IDR. Investors and firms should keep an eye out for the actualisation of these shifts in tax policies and their potential to once again spark domestic consumption.

Global Business Guide Indonesia - 9th June 2015

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)