Gayatri Sroyo

JAKARTA, Reuters – On Thursday, the Indonesian Parliament will decide whether or not to support the government’s plans for one of Indonesia’s most ambitious tax reforms. This includes raising the VAT rate and cancelling a proposed corporate tax reduction.

According to the government, Tax Harmonisation is intended to optimize revenue collection while providing a fairer tax system. This comes after the COVID-19 epidemic took a huge hit on state coffers last year.

However, analysts and business groups are questioning the timing for the tax rises. Analysts believe that the economic recovery following the pandemic is still fragile.

According to Reuters’s copy, the bill would see VAT for nearly all goods and service sales rise from 10% to 11% now to April 2019 and then to 12% in 2025.

This bill would keep the corporate rate at 22%. It is not lower than the original plan of reducing it to 20% next years. Others in the bill are a higher income rate for wealthy people, and an income tax cut to most others.

Last week, the finance committee of parliament approved the bill. The endorsement of the commission is usually followed by parliament.

The government made concessions to some of its original plans. It had initially sought to increase VAT to 12.5% in one move. The plan to add a minimal tax on loss-making businesses suspected of tax avoidance was also scrapped.

Myrdal gunarto, an economist from Maybank Indonesia said that changes made to the original plans were good for economic recovery and public finances.

He said that “the effect of the staged VAT modifications will not be too severe on inflation…and the tax cut might give some room to people increase consumption.”

These measures may also be able to help the government record higher revenues next year. This could reduce the fiscal deficit, and assist authorities in meeting a goal to lower the budget gap below 3% GDP by 2023, according to Helmi Arman, Citi economist.

Local media reports that some business associations, like the Association of Shopping Mall Operators, are asking parliament to defer the VAT rise to let people’s buying power recover.