Finance Minister Sri Mulyani Indrawati. (Antara Photo/Muhammad Adimaja)

Indonesia Eyes Biggest Deficit in Three Decades as the Country Sets to Cut Corporate Income Tax


MAY 19, 2020

Jakarta. The Finance Ministry has projected the government to post its biggest deficit in at least three decades this year as a combined result of shrinking state revenues, including from the corporate income tax cut, and the government's continuing efforts in providing stimulus to businesses coping with a prolonged impact of the Covid-19 pandemic.

Finance Minister Sri Mulyani Indrawati said the deficit would reach Rp 1,028.5 trillion ($69 billion), or 6.27 percent of the country's gross domestic product (GDP) this year. That would be the largest deficit since at least 1988.

A month ago, the government's deficit target was Rp 853 trillion, or 5.1 percent of the GDP, already surpassed the country's typical cap of 3 percent. 

"The deficit is due to the effort to back and push our economy to survive the Covid-19 pandemic," Sri Mulyani said.


The ministry estimated tax revenue would shrink 9.2 percent, while non-tax revenues, including dividends from state-owned enterprises and royalties from mines and oil wells, dropping 30 percent from last year. 

Government budget would be set back by Rp 20 trillion as the government planned to cut the corporate tax rate to 22 percent from 25 percent this year, Sri Mulyani said. 

That means that the state would only be able to collect Rp 1,692 trillion, lower than Rp 1,761 trillion revised targets set in a 2020 presidential decree about the state budget. President Joko "Jokowi" Widodo issued the decree last month after issuing a government regulation in lieu of law (Perppu) to tackle the pandemic emergency. The House of Representatives passed into law the Perppu last week. 

The minister said that to close the deficit, the government would continue with government bonds issuance. Bank Indonesia, the country central bank, has said it would be the standby buyer of the bonds should market fail to absorb the issuance. 

National Economic Recovery Fund

There would be Rp 106 trillion addition to the government spending, on top of the Rp 405 trillion stimuli it announced in March and the Rp 10.5 trillion subsidies for the tourism and hospitality sectors.

The additional spending includes incentives for small and medium enterprises (SMEs), subsidy for electricity fees, which the government extended to six months from three, cash aid, which would be prolonged to December, as well as stimulus reserve.

Sri Mulyani said the combined stimulus spending and various tax cuts would amount to Rp 641 trillion under the so-called National Economic Recovery program. 

The program consists of, first, the social safety net programs, including cash and non-cash aids, pre-employment card programs, among others, aimed at the most vulnerable Indonesians. The government set aside Rp 172 trillion for the program. 

Subsidies for loan interest payment, aimed mainly for SMEs would take up Rp 34.15 trillion. The government also provides various tax incentives for SMEs and business in general, at Rp 123 trillion.

The government would use Rp 2.78 trillion from the state budget for biofuel subsidy for the B30 program

Compensation for state-owned enterprises (SOEs) affected by the pandemic is also part of the plan. For the state utility company Perusahaan Listrik Negara (PLN) and state company Pertamina, the compensation figure is at Rp 90.4 trillion.

Ministries, state agencies, and sectoral expenditure would spend Rp 65.1 trillion.

The government also assists local governments, including in the form of a loan, at Rp 15.1 trillion in total.

For new working capital credit (KMK) for SMEs, the government prepares Rp 6 trillion.

The government's capital injection and capital credit for other SOEs affected by the pandemic are at Rp 25.3 trillion and Rp 19.7 trillion, respectively.

The government would also make fund placement in banks to assist the credit restructuring process for SMEs. Based on data from OJK, the figure may reach Rp 87.6 trillion, but the government has yet to finalize it.

Tax Incentives for Business

Under the National Economic Recovery program, the government also expanded tax incentives so that more businesses could get the benefit. Hence, the increase in budget to Rp 123 trillion in total.

The total incentive for individual income tax (PPh 21) is now at Rp 25.7 trillion, up from Rp 8.6 trillion previously. Currently, 1,062 business types are eligible for the incentive, up from only 440 business types in manufacturing sectors previously.

SMEs with certain gross sales and paying with final income tax (PPh Final) are now released from the obligation to pay it. The government earmarked a total of Rp 2.4 trillion for the incentives.

The government has also deferred payments of income taxes for importation (PPh 22). The total is now at Rp 14.8 trillion from previously Rp 8.2 trillion with 431 business types currently eligible from the previous 102.

Deductible corporate income taxes (PPh 25) is now available for 846 business types from the previous 102 in manufacturing sectors, and the total incentive increase from Rp 4.2 trillion to Rp 14.4 trillion.

The incentive for a tax return is at Rp 5.8 trillion from Rp 1.5 trillion – with 431 business types now eligible from the previous 102.

The government reduced corporate tax to 22 percent from 25 percent, and the total incentive is Rp 20 trillion.

Sri said the government would keep reserves for PPh 21 and other incentives at Rp 14 trillion and Rp 21 trillion, respectively, should their realization exceed the planned amounts.