By Vivienne Russell | 27 September 2012
Indonesia needs to increase its tax collection rates to finance infrastructure and a social safety net, the Organisation for Economic Co-operation and Development said today.
In its annual economic survey of the country, the OECD praised the ‘substantial economic, institutional and social progress’ it had made in the past 15 years.
But the organisation noted that the country had an ‘unduly low’ tax-to-gross domestic product ratio of just 12%. It urged Indonesia to remove a series of tax exemptions and holidays, including those applied to employer-provided fringe benefits, VAT and some specific sectors and investment projects. Improving the tax compliance of high-income individuals could also increase public revenue and make the tax system fairer, the OECD added. The tax base should also be widened and tax administration improved.
OECD secretary-general Angel Gurría said Indonesia had ‘weathered the economic crisis quite well and poverty had come down markedly’.
He added: ‘The government’s challenge now is to boost productivity, reduce energy subsidies and raise tax collection to finance key infrastructure, social and environmental programmes.
‘Investing in an effective social safety net and improving education and skills will make higher living standards accessible to all and ensure that future growth will be inclusive and substantial.’
The survey highlighted strong and stable growth rates of 5% to 6.6%. It urged greater investment in small and medium-sized enterprises, which employ 97% of Indonesia’s workforce but provide only 57% of value-added.
A parallel OECD report, also published today, examined the changes to the regulatory framework that will be necessary to implement the Indonesian government’s development and growth plans. It recommends that the country’s Co-ordinating Ministry for Economic Affairs implements a government-wide policy to strengthen institutions and improve regulations based on international best practice.
Indonesia has set itself an objective of becoming one of the world’s ten largest economies by 2025.
