Indonesia passes law on VAT, luxury sales tax

By Reuters Staff
September 16, 2009

Indonesia's finance minister, Sri Mulyani Indrawati, arrives for the G20 Finance Ministers meeting at the Treasury, in central London September 5, 2009, REUTERS/Dominic Lipinski/Pool      By Dicky Kristanto and Andreas Ismar
JAKARTA, Sept 16 (Reuters) – Indonesia’s parliament on Wednesday passed a revised law on value added tax (VAT) and sales tax on luxury goods, which could boost corporate mergers and spur the country’s fledging Islamic markets.

The law will come into effect in April and will scrap double taxation on transactions in Islamic financial markets and reduce costs related to the transfer of taxable assets in corporate mergers and acquisitions.

The change remove VAT on basic foodstuffs such as eggs, milk, fruit, soybean and meat to make them more affordable. Indonesia is one of Asia’s biggest importers of basic food.

“The government is fully aware that the changes are required to create a better and more competitive economy in the long term, although in the short term, this will lead to lower (tax) revenue,” Finance Minister Sri Mulyani Indrawati told lawmakers.
ISLAMIC MARKETS
Analysts say the new law can spur the development of Indonesia’s Islamic financial market, which is underdeveloped compared with the likes of Malaysia, Asia’s leader in the sector.

The local industry will be “more in line with the global standards” thanks to the new law, said Enrico Tanuwidjaja, an economist at OCBC Bank in Singapore.

Andi Buchari, a director at unlisted, mid-sized sharia lender Bank Muamalat, which is partly owned by Islamic Development Bank, said he expected the new law to attract foreign investment into the country’s Islamic financial markets.

However, issuers will still wait for further evidence of economic growth before looking to raise fresh debt, analysts said.

Under the new law, the VAT rate will be set between 5-15 percent of the selling price, against a fixed rate of 10 percent currently.

The maximum rate for luxury goods sales tax will be set at 200 percent of the selling price, against 75 percent currently. The minimum rate remains unchanged at 10 percent.

Details of which luxury goods will be affected and related tax rates will be provided in supporting government regulations, but local media have said that high-end cars and yachts are likely to see higher VAT rates.

In the case of mergers and acquisitions, the transfer of taxable assets such as properties and vehicles to the buyer will no longer be subject to VAT.

There are currently around 120 commercial banks in the country, and the central bank is keen to see further consolidation. High tax costs are one of the barriers to M&A deals in the country.

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