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ViewpointMarch 27 2017

Finance minister Indrawati takes on Indonesia’s most taxing problem

As finance minister of Indonesia, one of Sri Mulyani Indrawati’s priorities is to boost government revenue by tackling low tax receipts. These are caused by an overly complicated system – but modifying regulation will be a slow process. Meanwhile, she has major industries that are paying relatively low levels of tax in her sights, as Stefania Palma reports.
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Former World Bank official and the country’s finance minister until 2010, Sri Mulyani Indrawati was welcomed with excitement when she was appointed once again as finance minister of Indonesia in July 2016 after a cabinet reshuffle. She is seen as competent, driven and pragmatic. 

Soon after taking office, Ms Indrawati revised the 2016 budget mid-fiscal year. She says: “When I took the job, we looked at the budget and saw that the [government] revenue performance for the first half of the year was significantly below expectations.” At that rate, there would have been a Rp218,000bn gap ($16.3bn) by the end of the fiscal year, equal to 1.8% of Indonesia’s gross domestic product (GDP), and the budget deficit would have grown past the limit set by Indonesian law, 3% of GDP.

To avoid this, addressing Indonesia’s poor tax revenue was a priority for Ms Indrawati. “The declining tax-to-GDP ratio of the past five years was just shocking,” she says. The ratio fell from 20% in 2010 to just 3.5% today. 

Complex regulation

Part of the problem is regulation. “Indonesia’s VAT and income taxes are among the most complicated in the world. There are too many exemptions, and so many loopholes that [allow people and businesses] to abuse the system,” says Ms Indrawati. “Our tax collection costs in terms of administrative arrangements is becoming so high.”

The mining and construction sectors stand out for their low tax contributions given the size of these industries. Of the mining sector, Ms Indrawati says: “We really need to investigate. Is there any governance problem? We are [also] looking [into] how mining licences are granted, which is a responsibility of the local and national governments.” It is important for mining companies to increase their tax contributions especially because they are often based in poorer areas outside the island of Java, she adds.

Ms Indrawati is also keen to monitor the trade, e-commerce and communication sectors as they develop on the back of Indonesia’s digitisation drive (see cover story on page 20). “This sector is growing at 10% to 11% when the economy is only growing 5% to 5.5%. Its contribution is increasing but this sector’s potential tax contribution is still very high,” she says.

The finance minister is working with the tax team to modify regulation. But the political process of debating legislative changes is not moving as quickly as expected, says Ms Indrawati. Indonesia’s parliament can debate only up to two legislative changes per financial year and there is a large backlog of reforms that still need to be debated.

To avoid breaching the 3% of GDP deficit limit, Ms Indrawati also cut or delayed fund transfers to local governments in 2016. “When we saw money being used for an extravaganza of meetings or retreats, we cut drastically, up to the bone,” she says.

Regional government transfers 

The minister also cut excess funds that were being transferred to local governments for teacher bonuses, after identifying Rp23,000bn in idle money. Some local governments had overbudgeted for the number of teachers eligible for these bonuses. “So I said, what in the world are we doing? We don’t have enough revenue but the government is spending something that is not even being used?” says Ms Indrawati. 

To limit the government deficit further, the minister also delayed transfers to the richest provinces running budget surpluses. But by the end of 2016, the national government had returned all the momentarily borrowed funds to local governments.

In 2017, the budget prioritises education, which accounts for 20% of the budget. Second to that is infrastructure, which accounts for 17% of government spending. “Infrastructure spending in 2014 was less than Rp100,000bn. Now it’s more than three-and-a-half times that number,” says Ms Indrawati. “Infrastructure is critical. Inequality and poverty reduction can be addressed if you develop the right infrastructure design.” 

But not all infrastructure financing needs can be addressed by a budget alone. Among other initiatives, the government is injecting capital into state-owned enterprises (SOEs) involved in infrastructure projects. “SOEs’ ability to leverage equity is much higher than the government’s: $1 in the state will achieve $0.85, as 15% is lost in administration. If you put $1 in an SOE, it can increase leverage up to four or five times and generate funding from abroad,” says Ms Indrawati. In 2016, the state injected Rp55,000bn-worth of capital in SOEs.

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