The IMF has issued a report after its Article IV consultations with Indonesia. The Indonesian economy slowed in 2014 but growth is expected to increase to 5.2% in 2014 with an increase in public investment in infrastructure. Economic risks arise from a slowdown in the economies of emerging market trading partners and surges in volatility on global financial markets. Fiscal policy should aim to create space for more social and capital spending, with a broad strategy for increasing non-oil tax revenue.
Indonesia has experienced budgetary pressures in recent years mainly as a result of rising energy subsidies and weak revenue collections. There are structural weaknesses in tax revenues and a decline in oil prices. Reversing the general decline in revenues will take time.
The revised budget proposals for 2015 aim to increase non-oil tax revenues. This is intended to offset the reduced oil and gas revenues. The IMF is recommending a moderate increase in fuel excises that could be easily absorbed by consumers in view of the recent lower fuel prices. Additional tax revenue could be collected through higher taxes on tobacco and luxury goods.
In the medium term the IMF encourages the Indonesian government to pursue tax reforms with an initial focus on broadening the tax base, streamlining the tax exemptions especially in value added tax (VAT) and putting the emphasis on risk-based tax administration. These reforms will require time to plan and implement property and there will therefore only be a gradual increase in tax revenues as a result of the reforms.
The IMF considers that a greater rise in tax revenues would require broader reforms such as rationalizing corporate tax rates, strengthening the property tax regime and raising the rate of VAT and some excise duties.
The Indonesian government is looking for substantial gains in tax collection through improved tax administration, increasing the amount of capacity available to the Directorate General of Taxation. The government is also expecting higher growth of tax collections in 2015.