The short effect of tax Amnesty

While the government is still estimating how long will it take for the tax amnesty Law to affect the real sector, Indonesia Stock Exchange (IDX) president director Tito Sulistio has personally felt the impact.

For real, it made him taking a 7 kilometers walk from his skyscraper office building at SCBD area, to his house in Pondok Indah, South Jakarta.

Two global ratings agencies, Fitch Ratings and Moody’s, have appraised the coming tax amnesty policy in Indonesia as it will help bolster the state revenue and especially the rupiah currency, in the short-term.

The move is credit positive, as it underscores President Joko Widodo’s continued commitment to reform, and marks the first significant step to offset the impact of low oil prices and softening growth on government revenues.

“We expect a positive effect on revenues, but the likely uptake rate and the extent of the boost to income cannot yet be reliably estimated, given uncertain global conditions and partly because the bill does not specify enhanced enforcement mechanisms, such as higher penalties for non-compliance,” said Moody’s spokesperson Hector Lim in a press statement on Friday.

However, the ratings firm concerned of the low government revenue at only 13 percent of gross domestic product (GDP) in 2015, the lowest among investment grade countries. The total government revenue dropped 1.7 percent last year, largely due to lower oil and gas receipts.

Fitch shared the same concern, saying that Indonesia's small fiscal base is a credit weakness, as only four out of 113 rated sovereigns have a smaller revenue intake as a percentage of GDP and they are in lower rating categories.

“A larger revenue base would mean less fiscal rigidity and vulnerability to public finance shocks while enabling greater infrastructure investment to facilitate higher growth. Indonesia has also historically had a relatively large revenue dependence on commodities, which a larger fiscal base would mitigate,” Fitch’s director sovereigns Thomas Rookmarker wrote in his report.

The amnesty scheme, which will run through March 2017, will charge tax evaders a 4 percent to 10 percent penalty on assets, depending on how soon they declare them. If holders repatriate their assets, which must be kept in Indonesia for at least three years, the rate will halve.

The government estimates the amnesty will boost revenues by Rp165 trillion (US$12.5 billion or 1.3 percent of GDP) in 2016. This would give the administration more flexibility to expand fiscal spending to support the economy without breaching its legal deficit ceiling of 3.0% of GDP. 

Besides boosting revenues, inflows from the tax amnesty will help to protect Indonesia against external pressures, at a time when global capital flows have been increasingly volatile. The country’s current account deficit narrowed to 2.1% of GDP in 2015 from 3.1% a year earlier, on weak commodity prices.