Indonesia’s plan to lower corporate tax rates to 20 per cent from 25 per cent is positive for earnings of most listed companies, say analysts from Maybank Kim Eng.

The objective of lowering its corporate income taxes is to make Indonesia competitive with neighbouring countries, which the analysts believe will indeed help Indonesia improve its competitiveness.

However, the analysts said that the government would need to work on several things before implementation.

Firstly, to change a law, the Indonesian government will need parliamentary approval. As the new president and parliamentary members will only be inaugurated in Oct, the analysts do not expect any change this year. This is in line with the expectations of the Indonesian government.

Secondly, there needs to be revenue compensation as the Indonesian government forecasted its potential losses to be 5 per cent of its 2019 tax revenue target. Income tax revenue from non-oil & gas (O&G) corporates accounts for 25 per cent of its 2019 tax-revenue target. Analysts estimated that, all things being equal, it would need to raise value-added tax (VAT) to 13 per cent from 10 per cent to compensate for this. If it does not raise VAT, analysts believe tax collection will need to be enhanced. Either way, this would have implication to domestic economic activities.

Finally, regardless the option the government would choose, this move could create shock, at least in near term, to the domestic economy in particular. One must also note that the overall economy is almost fully driven by domestic economic activities.

That being said, the analysts believe that lower tax rates will not happen anytime soon due to the need for parliamentary approval and revenue compensation.