Taxing Times
    Category: Column By : Todd Lauchlan Read : 1118 Date : Tuesday, May 05, 2015 - 10:55:31

    A colleague on our residential team shocked me recently when he told me about possible changes in property tax code in Indonesia. “Do you know what’s going on?” he asked. He said the administration is mulling higher property taxes to fund new social programs. President Joko “Jokowi” Widodo wants to hit a tax-revenue target of Rp 1.5 quadrillion—about $115 billion, up 30% from the previous year.

    Indonesia desperately needs funds. But already there is a slowdown in the residential property market—and new taxes could really weigh it down. Currently, there already is a 5% “superluxury” tax on property sales above 10 billion rupiah or over 500 square meters, in terms of a house, or over 400 square meters for an apartment. The government is considering whether to lower that threshold to Rp 2 billion or 400 square meters for a house and 150 square meters for a flat.

    “Such prices look too low be seen as luxury,” Nomura analyst Anthony Yunus writes. The current tax affects only the very top end of the real-estate sector. A lower limit would hit middle class buyers, with the property industry effectively paying taxes of 40%, which could be passed on to buyers.

    There is already a 10% value-added tax on the sale of all goods, whether buying a television or a condo. Then there is another 20% tax on the sale of new landed houses that are over 350 square meters in size, or 150 square meters in terms of new apartments. There is an idea to change that to a price threshold, with tax due on houses sold for more than 1.5 billion rupiah and apartments at more than 1.2 billion rupiah.  

    Companies then pay income tax of 5%, and building and transfer fees add another 5%. But the biggest change would be the lower luxury-tax threshold, by effectively placing a 35% tax on the sale of many new high-rise apartments in Jakarta.

    It seems the immediate pressure is off. The Indonesian Real Estate Association says that the tax office will postpone any decision until further notice—though it would form a working team if the increase is back on the table.

    There are countercurrents. The minister of agrarian and land reform, Ferry Mursyidan, said in January that he wanted to scrap the taxable value of property, eliminate property transfer fees and abolish the annual land and building tax. That, he said, would ease the burden on taxpayers and boost the economy.

    But the government does need more revenue, and in many countries, property is taxed in some form. The IMF says that Indonesia should cut certain tax breaks allowed on the value-added tax and bolster the enforcement of existing taxes.

    If anything, the government should better collect already existing taxes. For example, Indonesian buyers and sellers manipulate sales prices to keep them below the tax thresholds, which the government could try to remedy. Deutsche Bank analysts Albert Saputro and Edeline Rasjid say the real-estate association head suggested in a recent meeting that the tax department is aware of the potential negative effect of any tax changes. And Deutsche Bank remains positive on the housing sector, but “acknowledge the risks of unfavorable actual regulation.” It seems that has been averted—for now.