Monday, February 02, 2009 Vincent Lingga, The Jakarta Post, Jakarta
Of all components of the Rp 71.3 trillion (US$6.5 billion) fiscal stimulus package Finance Minister Sri Mulyani Indrawati reported to the parliament last week, tax cuts and waiving of payroll taxes make the most sense as long as they are designed for those who will most likely spend, rather than, save.
Different from the other component of the stimulus-the Rp 10.2 trillion in additional infrastructure spending, which will take far longer to implement as the tendering process alone sometimes takes as long as one or two months - tax cuts can be put to work within weeks.
Their effects also can percolate into the economy much quicker.
Many businesses may not realize it and those that are aware of it may be reluctant about acknowledging that they are actually enjoying the fiscal stimulus in the form of tax cuts resulting from the enforcement of the 2008 Income Tax Law starting last month.
In fact, I assume the Rp 43 trillion (US$3.6 billion) in tax savings, or 60 percent of the Rp 71.3 trillion pump priming package, will be derived from tax cuts brought about by the new income tax law throughout this year.
The new income tax law reduces tax rates for individuals from five to four layers, with the highest level down from 35 percent to 30 percent, and sets a flat rate of 28 percent for businesses for 2009 and 25 percent in subsequent years, down from the highest rate of 30 percent under the old law.
The new law also increases tax allowances for low-income earners by more than 15 percent by raising the maximum income exempted from tax from Rp 13.2 million to Rp 15.8 million a year for a single taxpayer and from Rp 18 million to Rp 21.04 million a year for a married taxpayer.
The tax cuts resulting from the new income tax law take effect immediately and permanently because they apply to each additional rupiah of income that an individual or company earns.
Likewise, the Rp 6.5 trillion in waived payroll taxes to be provided also as part of the Rp 71.3 trillion stimulus will help bolster businesses as they will inject more income into the corporate system by reducing the employer contribution to employees' income taxes.
These payroll tax cuts and the other Rp 6 trillion-worth of waived value-added taxes and import duties to be granted to selected businesses will immediately cut the operating or production costs of enterprises and increase their income.
Further down the road, the cost of labor will decline, thereby encouraging hiring, and profits will encourage businesses to expand.
Unfortunately, as Sri Mulyani said last Wednesday, her ministry was still working on the technical details over which companies in which sectors will be eligible for the Rp 6.5 trillion cuts in payroll taxes and the Rp 6 trillion in waived value-added taxes and import duties on basic materials and capital goods.
It is regrettable, though, as to why the distribution mechanism for the payroll tax cuts and import duty relief has not yet been set up, whereas the government has been talking about the stimulus package since last October.
The finance minister demonstrated the government's full understanding of the uphill challenges the economy is facing when she said after the House's approval of the 2009 state budget last October that the stimulus would be extended in the form of tax cuts and import duty relief and much bigger spending on basic infrastructure and poverty alleviation programs.
Put briefly, the stimulus is rightly designed to increase people's purchasing power and the competitiveness of businesses facing the economic downturn.
All this is needed because the global downturn is adversely affecting Indonesia's economy on all fronts, from slumping demand for exports and slowing down flows of investment, to weakening consumer purchasing power.
The government pump priming, therefore, would take up the slack, otherwise private investment and the economy as a whole will plunge even more.
But almost four months later, the operational mechanism of the stimulus package remains on the drawing board. What a sense of urgency to cope with the sharp global downturn that is already hitting hard on our economy!
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