Tax ratio target raised to 9.5% of GDP this year

Finance Ministry banks on implementation of new tax rules, continued economic recovery

The Finance Ministry has raised its annual tax revenue target in 2022, banking on the implementation of new tax regulations and continued economic recovery.

The ministry’s Fiscal Policy Agency head Febrio Nathan Kacaribu said the government was aiming for a tax-to-GDP ratio of between 9.3 and 9.5 percent this year, higher than the 9.11 percent achieved last year.

Febrio said the higher target took into account the Harmonized Tax Law taking effect this year. The law raises income tax for the rich, increases valueadded tax (VAT), introduces carbon taxes and a second tax amnesty program.

“We hope it could be above 10 percent of GDP in 2024, through reforms on the policy and administrative side,” Febrio told reporters during a virtual discussion on Thursday.

Indonesia’s tax-to-GDP ratio fell to 8.33 percent in 2020, the lowest level in the past decade, as state income fell amid the pandemic-induced economic downturn.

A strong economic recovery in 2021 helped the government regain its bearings ahead of the upcoming fiscal consolidation. The GDP grew 3.69 percent last year, an improvement following a contraction of 2.1 percent the previous year.

Existing regulations stipulate that the government must reinstate a budget deficit cap of 3 percent of GDP by 2023. This could be achieved by either increasing revenue or massively cutting spending, which is also necessary for an economic recovery.

Febrio said the new tax law would not weigh on the public or businesses. This included a VAT hike to 11 percent from 10 percent slated to take effect on April 1 this year.

“The [VAT] increase is narrow and it will start on April 1, which only accounts for three-fourths of this year. Its impact on 2022 inflation would be quite limited,” Febrio said.

Ready with fiscal support

Finance Minister Sri Mulyani Indrawati said on Wednesday that tax revenue jumped by 19.2 percent annually last year, indicating a recovery across various sectors from manufacturing and trade to financial services, among many others.

“So, with that recovery, which is actually quite strong in the tax, excise as well as customs [revenue], we can actually support the spending of the government,” she told audiences during the Mandiri Investment Forum.

A higher tax revenue target helped lower the budget deficit to 4.65 percent in 2021. Sri Mulyani believed the government could achieve an even lower deficit than the initial 4.85 percent of GDP target set for this year, supported by much focused and disciplined spending.

With this larger fiscal space, the finance minister remained optimistic that the government could continue to support the economic recovery this year, despite the ongoing fiscal consolidation.

Sri Mulyani highlighted three main priorities for the state budget this year, which are restoring the health of the people, the economy and the budget.

She also said the government could continue supporting economic recovery in 2023, should the need arise. But if things got better, the government may retract fiscal support.

“If the momentum of the recovery continues across the board, as I also presented earlier, then fiscal support should not become the most dominant [force] because economic activity has already recovered,” said Sri Mulyani.