Government to Slash Corporate Income Tax to 20 Percent

Government to Slash Corporate Income Tax to 20 Percent Government to Slash Corporate Income Tax to 20 Percent

The government aims to boost the local business sector amid the global and domestic economic slowdown by lowering corporate income tax. However, the government is working hard to ensure that the policy does affect tax revenue.

Finance Minister Bambang Brodjonegoro said that the government plans to reduce corporate income tax to 20 percent of net profit. The plan will be put before the House of Representatives for approval in conjunction with the revision of the Income Tax Law. "We plan to reduce corporate income tax," Bambang said after a working meeting with the finance commission (Commission XI) of the House of Representatives in Jakarta on Monday (11/4).

Bambang hopes that talks on reducing corporate income tax and on the Income Tax Law could begin as soon as possible. After all, the revision of the law is included in this year’s National Legislation Program. However, he is aware the discussions may take time because the parliament and the government are currently finalising the Tax Amnesty Bill as well. “Sometimes it’s difficult to discuss more than two (laws) during a single session," he said.

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While individual income tax rates range between 5 percent and 30 percent of monthly or annual income, the current corporate income tax rate is 25 percent of net profit. This is considered too high for companies amid the current economic slowdown. It may encourage companies to move to other countries that charge a lower rate of corporate income tax.

According to Bambang, the corporate income tax rate of 20 percent is quite competitive and on par with some other ASEAN countries. "We want a rate that is comparable with that of neighbouring countries, but close to that of other ASEAN countries. 20 percent is still competitive in ASEAN," he said.

(Read: Government Eyes Individual Taxes After Targeting Largest Corporate Payers)

Although the rate is higher than in neighbouring countries like Singapore, Bambang said that the government would not reduce the corporate income tax rate to below 20 percent, because of the effect it would have on tax revenue. "We can’t match Singapore because the circumstances in Indonesia are different," said Bambang. He added that tax raised in Singapore is used as a growth instrument and not as a source of state revenue. "Because it’s (Singapore) a small country."

(Read: Government to Lower Income Taxes to Broaden Tax Bases)

Late last year, while serving as presidential chief of staff, coordinating minister for political, legal and security affairs Luhut Binsar Panjaitan proposed slashing corporate income tax to 17.5 - 17.8 percent, to prevent a shift of profits to foreign countries, including Singapore.

Responding to the plan, executive director of the Centre for Indonesian Taxation Analysis (CITA) Justin Prastowo said that in-depth research on the potential benefit of the policy was needed. If the high rate means low tax compliance, this policy could be beneficial.