Economy Investment tax incentives on the horizon - DBS

The government is planning to introduce more tax incentives to selected industries in the coming months. According to the Investment Coordinating Board (BKPM), capital intensive (IDR 100bn with at least 100 workers) and labor-intensive (IDR 50bn with at least 300 workers) industries may apply for the benefits. A 5-8 year tax holiday may also be introduced. Considering that Indonesia’s corporate tax rate is still at a relatively high 25%, these tax measures will spur a surge of investment as firms (which have been holding off on investing in anticipation of the tax breaks since last year) start to make good on their investment commitments.

If the government successfully implements the policy as planned by September, we could see a sharp sequential surge in investment in 4Q11 and 1Q12. With domestic investment realization already up by 50.7% YoY for 1H and foreign direct investment realization up by 16.2% over the same time period, these are all encouraging signs for growth this year. In our view, these policies are positive short-term measures that Indonesia has to utilize as it resolves its structural investment problems. Moreover, given its strong fiscal position, we reckon that the government can afford to draw down its coffers to stimulate investment and job growth