Indonesia on high alert as economic slowdown may further reduce tax revenue

The government is on high alert over a possible increase in tax shortfall this year as the economic slowdown is likely to continue until the end of the year.

Sluggish economic growth since early this year has begun to hurt the government’s tax revenue, which contributes the larger part of the state budget.

According to data provided by the Finance Ministry, from January-August, the government raised Rp 801.16 trillion (US$56.84 billion) in tax revenue, which only accounts for 50.78 percent of the tax revenue target in the 2019 state budget. The figure only showed a 0.21 percent increase from that collected during the same period last year, during which tax revenue had risen 16.52 percent.

Although all types of taxes recorded positive growth, their increases were still much lower than that in previous years. Income tax receipts, for example, only grew 10.6 percent yoy, which was lower than the 16.4 percent in January-August last year.

Of the total tax revenue, individual income tax and import-related taxes only grew 15.4 percent yoy and 0.6 percent yoy, respectively. Meanwhile, corporate income tax only rose  0.6 percent from the figure recorded in January-August 2018.

However, value-added tax (VAT)—which contributed to 20.9 percent of the country’s tax revenue—recorded negative growth of 6.5 percent yoy, while the collection of import tax decreased 6 percent yoy from January to August.

Minister Sri Mulyani said on Tuesday that sluggish tax revenue from January-August indicated signs of a decline in the country’s economic growth, which resulted in both individuals and corporations paying less taxes compared to the same period in 2017 and 2018.

“This is a sign that taxpayers, especially companies, are not OK,” she said, adding that everyone should be wary as it also signaled that the economy was weakening.

She attributed the slowdown to several reasons, such as unfavorable global economic conditions due to the trade war and weakening commodity prices.

The trade war between the United States and China has been the main culprit of the global economic slowdown throughout the year. A decline in global trade also affected Indonesia’s manufacturing industry, as seen in the decline in tax receipts from the industrial sector.

From January- August, tax receipts from the manufacturing industry, which accounted for 28.9 percent of the country’s total tax revenue, fell 4.9 percent yoy.

Weakening commodity prices in the global market also played a part in the sluggish tax collection. Tax revenue from the mining industry and plantations showed a significant increase during nine-month period as prices of coal, crude palm oil (CPO) and other commodities continued to decline.

Although there have been signs of a global economic slowdown since early this year, its impact only began to affect the Indonesian economy in July and it is likely continue until the end of the year, Sri Mulyani said.

The World Bank estimates Indonesia’s GDP growth could slow to 4.9 percent next year and slide further to 4.6 percent in 2022 from 5.17 percent in 2018 amid intensifying risks such as the escalating trade war between the US and China.

Danny Darussalam Tax Center (DDTC) tax research partner Bawono Kristiaji told The Jakarta Post on Wednesday that this year’s tax revenues seemed to follow the pattern in 2015 and 2016. “During those years, tax receipts in the first eight months of the year fell between 45 percent and 53 percent of the state budget’s target, respectively,” he said via text message.

Economic pressures in those years, he said, were more or less the same as this year. Due to these circumstances, Bawono expected this year’s tax shortfall to widen from the government’s projection of Rp 140 trillion to around Rp 150 trillion to Rp 180 trillion.

However, he said, one thing that had changed since 2015-2016 was the government’s access to third-party data.

“In those years, the government did not have access to adequate third-party data that could be used to ensure taxpayers’ obedience,” he said via text message in reference to the Automatic Exchange of Information (AeO).

Indonesia formally joined the global treaty on the AEO on tax matters in September last year, enabling it get access in financial information of Indonesian taxpayers in signatory countries. With this data, the government can hunt down tax evaders more effectively.

He also suggested that the government raise taxes from digital transactions and implement a stricter taxation scheme for small and medium enterprises to widen the country’s tax base.

BNI Sekuritas chief economist Damhuri Nasution, meanwhile, suggested that the government even out its expenses so that they would not pile up at the end of the year to spur economic growth, while also maintaining low inflation for the remainder of the year.

 

Riska Rahman

The Jakarta Post