Is Tax Amnesty the Silver Bullet?
    Category: Column By : Haryanto T. Budiman Read : 886 Date : Friday, September 09, 2016 - 00:14:20

    Indonesia’s economy may have performed well so far this year; its fiscal health however, remains challenged. By the end of June, the state budget deficit had reached Rp 230 trillion, or 1.85% of gross domestic product. This was primarily driven by the lackluster collection in government revenue. If left unchecked, the deficit could breach the 3% threshold by the end of this year.

    It’s not surprising then, that the passage of the tax amnesty bill in June was greeted positively by financial markets. The Indonesia rupiah strengthened considerably in the weeks following the announcement and local stocks rose in tandem. There are high hopes that the bill will draw billions of dollars in repatriated funds to narrow the widening budget gap.

    The question remains, however, whether the tax amnesty can serve as the “silver bullet” for the country’s fiscal problem. The revenue target of Rp 165 trillion from the bill, based on certain set of assumptions on the assets declared and repatriated, is aggressive. Massive efforts are required on all fronts to generate the most impact.

    Key to the success of the program is the need to align the relevant stakeholders particularly the law enforcement agencies, as well as extensive and systematic socialization efforts to encourage participation. It is encouraging to note that President Joko Widodo himself is leading the efforts in major cities across the country, rallying citizens behind the program and sending a clear signal on the strategic importance of the initiative for the country’s economy.

    For the program to work, the government needs to pull their weight and take the following steps. First, speed is critical. There should be immediate clarity in terms of how the repatriated funds will be used, whether they are invested in financial products or to fund infrastructure projects. The options have to be developed and made available within the first three months of implementation.

    Second, it is essential to develop a contingency plan should the revenue collection fall short of targets. To that end, spending cuts on non-strategic initiatives should not be ruled out. Finally, with the tax amnesty bill being just one part of the wider economic reforms package, Indonesian authorities have to connect the dots and clearly communicate how the initiative can benefit the broader economy. With many central and local government bodies involved, it may be worth creating a central office to monitor, govern and execute against the various goals of the overall reforms package.

    Global volatility and uncertainty continue to provide headwinds to emerging markets including Indonesia. However, as Southeast Asia’s biggest economy and one of the region’s fastest-growing, the country continues to offer attractive opportunities for the increasingly sophisticated and discerning investors.