Indonesia: tax revenues slipping

11 August 2016

Economics

Indonesia: tax revenues slipping

DBS Group Research 11 August 2016

• On current trends, 2016 tax revenue will only reach 80% of target
• Even if the tax amnesty program brings the tax / GDP ratio up to
11.5%, it would still be low relative to regional peers
• More tweaks in the tax regime are necessary but these will take
time. For now, pressure remains on the central bank to support
growth

Government consumption makes up about 8% of GDP but contributed 10%

of the GDP growth in 2Q16. This led to the slight upside surprise in 2Q16 GDP
growth of 5.2% (YoY), against market expectations of 5.0%. Household con-
sumption growth was steady at 5% while investment growth eased to 5.1%
from 5.6% in 1Q16.
It is increasingly likely that the government will need to moderate its spending
going forward. Up until Jun16, budget deficit amounts to IDR 276tn, or ap-
proximately 2.2% of projected GDP this year. As the government is mandated
by law to keep deficit below 3% of GDP, there is a need to slow spending and/
or step up tax collection.
But raising revenues has been a real challenge this year. In 1H16, total revenue
and grants amounted to only 35.5% of this year’s target. Tax revenue collec-
tion fared even worse, at 33.9% of target. This is a deterioration from last year,
which was, in turn, worse than 2014 (Chart 1). At the current pace, 2016 tax
revenue is likely to reach only 80% of target. This would translate to a mere
0.8% growth from actual tax revenue in 2015, well below the government’s

Chart 1: Pace of tax revenue collection

% of annual target
100
Dec14: 92%
90
80
70
60 Dec15: 83%
50
40
30 33.9%
20
10 2014 2015 2016
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Gundy Cahyadi • (65) 6682-8760 • gundycahyadi@dbs.com

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Indonesia: tax revenues slipping 11 August 2016

Chart 2: Tax revenues / GDP ratio

%
2016 projection
13.0

12.5
12.5
16T - current budget target
16* - assumes IDR 165tn in
12.0 tax amnesty receipts
11.5
11.5

11.0

10.5
10.1
10.0
07 08 09 10 11 12 13 14 15 16P 16* 16T

25% assumption. It would also be the slowest growth since 2009, following the
global financial crisis.
Tax revenue / GDP – or the tax ratio – has fallen steadily since 2011-12 along
with the collapse of commodity prices. Thus the government’s target of 25%
tax revenue growth was never likely to be achieved. But 0.8% revenue growth
this year would lower the tax ratio to around 10.1%, which would be the low-
est since 2000 (Chart 2).
There are high hopes for the ongoing tax amnesty program, which is expected
to bring in an extra IDR 165tn worth of revenues up until Mar17. Assuming that
the extra revenues will be generated by the year-end, the tax ratio would go
up to 11.5%. While this would be the highest since 2008, it is still relatively low
when compared to an average of 14.4% for the rest of the ASEAN-5 in 2015.
Arguably, more tweaks in the tax regime are necessary. There are plans to low-
er the corporate tax rate, to make it more competitive with the region. Among
others, it is also likely to discourage transfer pricing and would raise tax rev-
enues in the medium-term.
Some tinkering with the current value-added tax (VAT) system might also be
worth another look. Currently, there is a long list of goods and services being
exempted. In the last 5 years, total revenues from the VAT were equivalent to
about 5.8% of annual household consumption, despite the nominal 10% tax
rate. Expanding the basket of items under the VAT or replacing it with a more
transparent goods and services tax could lead to additional, and significant,
tax revenues.
In the near-term, one effective way to raise tax revenues would be to further
lift taxes on products like cigarettes. Revenues from excise duties were among
the few that were on target in 2015, and they make up 10% of total tax col-
lection.
Change in the tax regime typically takes time to bring about. Given that the
government’s spending needs, however, there is a need to speed things up.
With the government’s hands seemingly tied, pressure will remain on the cen-
tral bank to do more to boost GDP growth.

Sources:
Data are sourced from CEIC and DBS (forecasts and transformations)

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 Indonesia: tax revenues slipping 11 August 2016

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