Gov't Says $1.6b Income Tax Breaks Available Only in Manufacturing Sector

Jakarta. The government on Friday provided some details on new tax breaks issued as part of a fiscal stimulus to prop up the economy during the coronavirus pandemic, saying that only some types of business in the manufacturing industry would be eligible for the $1.6 billion economic stimuli.

"The impact on the economic sector [from the pandemic] is certainly inevitable. World economic growth is projected to contract even deeper now," Coordinating Minister for the Economy Airlangga Hartarto said in a press conference on Friday. 

The government said on Wednesday it would waive income taxes from employees, entrepreneurs and importers but left out the details.

Finance Minister Sri Mulyani Indrawati said on Friday the tax breaks would only be made available in the manufacturing sector.

The government estimated the tax breaks would cost a total of Rp 22.9 trillion ($1.6 billion).

This is on top of the first fiscal stimulus for the tourism industry, which set the government back Rp 10.3 trillion. 

The employee income tax waiver (PPh 21) will only be available to workers in the manufacturing sector with salaries of up to Rp 200 million per year, including those who work in companies or small and medium-sized industries (IKM) that receive the government's ease of importation for export purposes (KITE) facility.

"The [tax breaks] will be given for six months, from April to September 2020. The cost borne out by the government will be around Rp 8.6 trillion," Sri Mulyani said.

"The tax breaks should allow workers in the manufacturing sector to earn more and maintain purchasing power," she said. 

Indonesia has 19 million workers in the manufacturing sector, accounting for 15 percent of Indonesia's total employment last year and the third-largest sector after agriculture and trade, according to data from the Central Statistics Agency (BPS). 

The government has also set aside Rp 4.2 trillion to slash 30 percent off income tax (PPh 25) paid by businesses in 19 manufacturing subsectors. 

The subsectors include chemical and chemical product; transportation equipment; food; base metal; paper and paper goods; beverage; pharmaceutical, chemical drug and traditional medicine; motor vehicle; trailers and semi-trailers. 

The industries include rubber; rubber and plastic goods; non-metal mining; apparel;  electrical equipment; textile; machinery and equipment; metal goods (excluding machinery and equipment); printing, media reproduction and recording; leather, leather goods and footwear; furniture; computer, electronic and optical goods.

The government would also not be collecting deductible income tax on imports of goods (PPh 22) from April to September to maintain cash flow in the local industry as it deals with the additional cost of switching import sources away from China.

Sri Mulyani said the government estimated the tax exemptions would cost Rp 8.15 trillion. 

China, where the Covid-19 disease first emerged, is Indonesia's main trading partner, accounting for up to 30 percent of the latter's raw material imports, Industry Minister Agus Gumiwang Kartasasmita said. 

"The manufacturing industry is looking for new sources to import raw materials. Alternative countries would be limited and the prices would be higher because other countries would also come looking for the same materials," Agus said. 

For its fourth stimulus package, from April until September the government would relax the requirements for value-added tax (PPN) restitutions in the 19 manufacturing subsectors, as well as for businesses and IKM that already receive the KITE facility.

Sri Mulyani said there was no limit on the value of special VAT refunds for exporters, while non-exporters would only be able to apply for VAT refunds of up to Rp 5 billion. 

The Finance Minister estimated the government would end up with a bill of Rp 1.97 trillion for the tax refunds over the next six months.