Boosting Indonesia’s Economic Growth: Luxury Goods Tax & Lending Rates

Next week Indonesian authorities start to exempt various goods from the country’s luxury tax in an effort to boost consumption in Indonesia’s slowing economy. Today (12/06), Indonesian Finance Minister Bambang Brodjonegoro said that the government aims to boost Indonesians’ purchasing power, industrial growth and to reduce consumers’ tendency to purchase goods abroad by scrapping the luxury goods sales tax for various products. Secondly, Indonesia will halve lending rates for some small businesses.

Economic growth of Indonesia slowed to a six-year low of 4.71 percent (y/y) in the first quarter of 2015 due to the impact of the sluggish global economy and reduced domestic economic activity including household consumption. Due to slowing economic growth, high inflation and the high interest rate environment set by Bank Indonesia (with the key interest rate at 7.50 percent in a bid to combat high inflation, a wide current account deficit and avert capital outflows ahead of further monetary tightening in the USA) Indonesians’ purchasing power has decreased. As domestic consumption accounts for about 58 percent of Indonesia’s gross domestic product (GDP), a slowdown of consumption tends to drag down the national economy.

Amid reduced purchasing power Indonesian retailers expect a slow Ramadan month this year in terms of sales revenue. Ramadan is the holy fasting month for Muslims and people tend to consume more during this month as well as during the subsequent Idul Fitri celebrations.

Products that will be exempted from the luxury tax include electrical appliances, sports equipment, music instruments, and branded goods. Products that remain subject to the luxury goods tax (ranging between 10 and 50 percent) include expensive cars, yachts, aircraft, guns, alcoholic beverages and larger properties. The value-added tax remains in place for all products.

Although this move would imply less tax income for the government, it is expected to boost consumption in Southeast Asia’s largest economy. The Directorate General of Tax at the Finance Ministry said that the tax exemption could mean about IDR 850 billion (USD $65 million) in lost tax income for the Indonesian government. However, this is merely less than one percent of the government’s taxation revenue target in 2015. Therefore, the government remains committed to its target of increasing tax collection by 30 percent in 2015, a target that has been labelled unrealistic by various institutions.

Indonesia’s luxury goods tax stems from the Suharto period when Indonesia was less developed and the poverty rate was higher than today. In that period it was much more difficult for society at large to purchase products such as electronics, furniture, refrigerators, washing machines, water heaters, cars, motorcycles and even property. Only the relatively small elite and upper middle class could afford these. Government revenue generated through this luxury tax could be used for poverty eradication.

Meanwhile, Brodjonegoro confirmed that the government of Indonesia will halve lending rates for some small businesses in a bid to boost Indonesia’s economic growth. These lending rates for small businesses are to be cut from 24 percent to 12 percent. However, the minister did not inform when this new policy would take effect. Yesterday (11/06), Indonesian Vice President Jusuf Kalla announced that those state-controlled banks that are taking part in a government-subsidized micro loan program agreed to cut lending rates. As such, the government prefers to boost credit expansion over state-controlled banks’ profit or financial figures. For example non-performing loans (NPLs) are expected to grow. Local media reported that the government’s micro-loan program disbursed a total of IDR 177 trillion (USD $13.4 billion) between 2007 and 2014 with the NPL level below 5 percent.

[“source-indonesia-investments.com”]