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Higher Taxes Key To Indonesian Economic Vision

by Mary Swire,, Hong Kong

17 October 2012

Indonesia must adopt a broader tax base, hike its tax-to-gross domestic product (GDP) ratio, and tackle the grey economy, if it is to reach its objective of becoming one of the world's 10 largest economies by 2025, the Organisation for Economic Cooperation and Development (OECD) has said.

The OECD's latest Economic Survey on Indonesia notes that the nation's economy, with strong and stable growth rates of 5-6.6% in recent years, is catching up with other countries in the region and allowing Indonesia to focus on its development agenda.

OECD Secretary-General Angel Gurria said: “Indonesia has made substantial economic, institutional and social progress. It has weathered the economic crisis quite well and poverty has come down markedly. The government’s challenge now is to boost productivity, reduce energy subsidies and raise tax collection to finance key infrastructure, social and environmental programmes. Investing in an effective social safety net and improving education and skills will make higher living standards accessible to all and ensure that future growth will be inclusive and sustainable.”

The report in particular suggests that, to finance wider coverage of its social security system and develop its infrastructure, Indonesia should increase its "unduly low" 12% tax-to-GDP ratio by removing tax exemptions on employer-provided fringe benefits, many value-added tax exemptions and tax holidays for specific sectors or investment projects, and increase taxes in the resource sector. Improving tax compliance among high-income individuals could increase public revenue and raise the "fairness" of the tax system, the report says. Lastly, it recommends that higher tax revenues can be best achieved through broadening tax bases and improving tax administration.

To foster continued growth, investment should be increased in innovation and boosting productivity particularly among small- and medium-sized enterprises, who employ 97% of the workforce but produce only 57% of value-added. Further, to strengthen the business environment, red tape could be reduced, and tax compliance costs could be brought down, the report concludes.

TAGS: individuals | environment | compliance | tax | economics | business | fiscal policy | energy | fringe benefits | gross domestic product (GDP) | Organisation for Economic Co-operation and Development (OECD) | education | Indonesia

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