Lower Corporate Income Tax Would Be Counterproductive

The government’s plan to reduce the corporate income tax rate to as low as 17.5 percent, from 25 percent now, would be counterproductive, an analyst from the Center for Indonesia Taxation Analysis says.

CITA analyst Yustinus Prastowo said the plan may actually do more harm than good, leading Indonesia further away from achieving its ambitious tax collection target.
According to data from the Finance Ministry, Rp 598.27 trillion ($41 billion) was collected in taxes as of Aug. 31 -- 46.22 percent of the Rp 1,294.26 trillion target at that point in the year.

Yustinus said that if the government aims to provide tax incentives to investors, that doesn't have to be in the form of lower tax rates.“It [the government] only needs to maximize the tax allowance,” said Yustinus. 

Yustinus pointed out that the experience in several countries showed that lower tax rates do not really help reduce tax evasion, nor do they necessarily boost tax collection. Yustinus said lowering corporate income tax “could lead into a lose-lose scenario where Indonesia would be disadvantaged.”Indonesia’s current corporate income tax rate is higher than Singapore’s (17 percent) and Thailand’s (20 percent). Yustinus said Indonesia should let go of the thought of matching Singapore’s competitiveness in regards to corporate income tax, as the city state has a different incentive structure. 

The analyst did not elaborate further, but under the Singapore Income Tax Act, the country offers various industry-specific and investment-related tax incentives. Yustinus said rather than trying to compete with neighboring nations by lowering the rate, Indonesia should use the Asean Economic Community -- which comes into force later this year -- to work together with its neighbors and create a single Southeast Asian tax system, standardize tax incentives and make arrangements for data exchange.

 This way, he said, investors can operate with more ease in the country without the need for a lower income tax. 

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