1Indonesia
M. Andru Akbar
Muhammad Futhra Bahar

I. Introduction
The name of “Indonesia” is derived from historical sequences that occurred in the middle of 19th century.
Some historical manuscripts revealed that Indonesia is a set of islands that spread between Indo-China
and Australia by various names. Eduard Douwes Dekker (1820-1887), known as “Multatuli”, citedIndonesia as Indian islands. On the other side, “Indonesia”, this name means Indian Islands, invented
by J. R. Logan, in Malaya in 1850. Taken from the Greek, Indos(India) and nesos(island), it has parallels
in Melanesia, "black islands"; Micronesia, "small islands"; and Polynesia, "many islands." A German
geographer, Adolf Bastian, used it in the title of his book, Indonesien, in 1884, and in 1928 Indonesiannationalists adopted it as the name of their nation.
Consisted of more than 17.000 islands, Indonesian lands spread out between two big continents Asia
and Australia and lay over the Equator between the Indian Ocean and the Pacific Ocean. While the landborders with the north to East Timor and Papua New Guinea and to the east with Malaysia, it alsoneighbors Australia to the south, and Philippines, Vietnam, Singapore, and Thailand to the north, also
India to the northwest.
After the independence day at 17 August 1945, the national anthem titled “Indonesia Raya” havebeen sung by children throughout the country to begin the school day, by civil servants at flag-raisingceremonies, over the radio to begin and close broadcasting; in cinemas and on television and at national
day celebrations. Radio and television, government owned and controlled for much of the second halfof the twentieth century, produced nationalizing programs as diverse as Indonesian language lessons,regional and ethnic dances and songs, and plays on national themes. Officially recognized "national
heroes" from diverse regions are honored by schools and biographies and with statues for their struggles
against the Dutch; some regions monumentalize local heroes of their own.
Indonesia is a unitary state that called “Negara KesatuanRepublik Indonesia” (The Unitary States of
The Republic of Indonesia). It extended from west to east (Sabang to Merauke) and from north to south(Mianggas to Rote Island). After its independence day at August 17th 1945, Indonesia founding fathers
decided that unitary state is an ideal form for Indonesia. It was not easy for Indonesia’s founding fathers
to establish unitary state because Indonesia was Dutch’s colony. Through some diplomacies andconferences, Dutch recognized Indonesia’s sovereignty as unitary state in Round Table Conference(KonferensiMejaBundar) at December 27th 1949.
The Bhinneka Tunggal Ika ("Unity in Diversity") is Indonesia motto, the concept that this country
always united even the country's citizen divide themselves along a vast slew of ethnicities, clans, tribesand even castes. The nation's official ideology, first formulated by President Sukarno in 1945, is the“Pancasila”, or Five Principles: belief in one supreme God; just and civilized humanitarianism;Indonesian unity; popular sovereignty governed by wise policies arrived at through deliberation andrepresentation; and social justice for all Indonesian people.
I.1 History and Culture
The modern of Indonesia begins in the period from 2500 BC to 1500 BC with a wave of light brownskinned Austronesia immigrants, thought to have originated in Taiwan. This Neolithic group of people,
skilled in open-ocean maritime travel and agriculture are believed to have quickly supplanted the1existing, less-developed population. Indonesian history has been influenced by foreign powers drawn to
its natural resources. Muslim traders and Sufi scholars brought the now-dominant Islam, while European
powers brought Christianity and fought one another to monopolize trade in the Spice Islands ofMalukuduring the Age of Discovery.
There is no one unified Indonesian culture as such, but the Hindu culture of the former Majapahit
empire does provide a framework for many of the cultural traditions found across the central islands ofSumatra, Java, Bali and Lombok. Perhaps the most distinctively "Indonesian" arts are wayangkulit
shadow puppetry, where intricately detailed cutouts act out scenes from the Mahabharata and Ramayana
and other popular folk stories, and its accompaniment the gamelan orchestra, whose incredibly complex
metallic rhythms are the obligatory backdrop to both religious ceremonies and traditional entertainment.
Modern-day Indonesian popular culture is largely dominated by the largest ethnic group, the Javanese.
Indonesia consists of 34 provinces. Each province has its own culture. It could be looked at from
Traditional houses, cultural events, traditional clothing, folk songs, local languages, traditional dancesand some local wisdom. Regarding language, National language is Indonesia (Bahasa). Indonesia
language has been united Indonesia from communication perspective formally even though local people
still use local language informally. Indonesia still upholds hierarchy in daily life continuously. Hierarchy
is very important in Indonesian society and people's status should be respected at all times. Status ismainly based on a person's age and (job) position. Most Indonesians - but in particular those of higher
status - should be addressed with a specific title (Bapak for men and Ibu for women). This can be in
combination with their name (Bapak Aditya) or position (BapakPresiden). These titles should
continuously be used when talking to a person of higher or similar status. And it is always good to talkin a subtle (almost soft) manner. Like other Asian Countries, personal relationship is very important forIndonesian people like building business relationship, involving in social community and Working
Together (GotongRoyong).
I.2 Geography and Climate
As explained above, Indonesia has 34 provinces that located in more than 17,000 islands providing
108,000 kilometers of beaches.

2

Table 1: Provinces and Capital Cities
Name of Province
Nanggoro Aceh Darusalam
Sumatera Utara (North Sumatera)
Sumatera Barat (West Sumatera)
Riau
Kepulauan Riau (Riau Islands)
Jambi
Bengkulu
Sumatera Selatan (South Sumatera)
Kepulauan Bangka Belitung (Bangka Belitung Islands)
Lampung
Banten
DKI Jakarta
Jawa Barat (West Java)
Jawa Tengah (Central Java)
Special Region of Yogyakarta
JawaTimur (East Java)
Bali
Kalimantan Barat (West Kalimantan)
Kalimantan Tengah (Central Kalimantan)
Kalimantan Selatan (South Kalimantan)
Kalimantan Timur (East Kalimantan)
Kalimantan Utara (North Kalimantan)
Sulawesi Barat
Sulawesi Selatan (South Sulawesi)
Sulawesi Tengah (Central Sulawesi)
Sulawesi Utara (North Sulawesi)
Sulawesi Tenggara (South East Sulawesi)
Gorontalo
Nusa Tenggara Barat (West Nusa Tenggara)
Nusa Tenggara Timur (East Nusa Tenggara)
MalukuKepulauan Maluku Utara (North Maluku Islands)
Papua Barat (West Papua)
Papua

Name of Capital City
Banda Aceh
Medan
PadangPekanbaru
Tanjung Pinang
Jambi
Bengkulu
Palembang
Pangkal Pinang
Lampung
SerangJakarta (Indonesia’s Capital City)
Bandung
Semarang
Yogyakarta
SurabayaDenpasar
Pontianak
Palangkaraya
Banjarmasin
Samarinda
Tarakan
MamujuUjung Pandang
Palu
ManadoKendari
Gorontalo
Mataram
KupangAmbon
SofifiManokwari
JayapuraIndonesia also has an area of 1,916, 862 sq. km. The distance between Aceh in the West and Papua
in the East is more than 4,000 km (2500 miles). The Ring of Fire Indonesia has more than 400 volcanoes,of which 130 are considered active, as well as many undersea volcanoes. The island of New Guinea (onwhich the Indonesian province of Papua is located) is the second largest island in the world. Here aresome main islands in Indonesia:• Sumatra (incl. the Riau Islands and Bangka-Belitung), wild and rugged, the 6th largest island in
the world has a great natural and cultural wealth with more than 40 million inhabitants. It is habitat
for many endangered species.
• Kalimantan (Borneo), the vast majority of this, the world's third largest island, is covered by theIndonesian province. Uncharted jungles, mighty rivers, home of the orangutan, a paradise for theadventurer.
• Java (and Madura), the country's heartland, big cities including the capital Jakarta, and a lot of
people packed on this island. Also features the cultural treasures of Yogyakarta, Borobudur
temple and Prambanan temple.
• Bali, by far the most popular visitor destination in Indonesia, Bali's blend of unique culture,legendary beaches, spectacular highland regions and unique underwater life make it a perennial
favorite amongst global travelers.
• Sulawesi (Celebes), strangely shaped, this island houses a diversity of societies and some
spectacular scenery, Toraja culture, rich flora and fauna, world class diving sites.
• Nusa Tenggara, also known as the Lesser Sunda Islands, the "Southeast Islands", contain scoresof ethnic groups, languages and religions, as well as Komodo lizards and more spectacular diving.
• Maluku (Moluccas), the historic Spice Islands, fought over to this day, largely unexplored andalmost unknown to the outside world.

3• Papua (Irian Jaya), the western half of the island of New Guinea, with mountains, forests, swamps,
an almost impenetrable wilderness in one of the most remote places on earth.
Indonesia is a warm place. It has no spring, summer, autumn, or winter, just two seasons: rainy anddry, both of which are relative (it still rains during the dry season, it just rains less). While there issignificant regional variation, in most of the country (including Java and Bali) the dry season is April to
October, while the wet season is November to March. In the highlands temperatures will naturally becooler, and there are even snow-covered peaks in Papua, whose mountains can soar above 5000 meter.
Since the country is very large, Indonesia is divided into three time zones:
GMT +7: Western Indonesian Time (WIB, Waktu Indonesia Barat) Sumatra, Java, west/central
Kalimantan.
GMT +8: Central Indonesian Time (WITA, Waktu Indonesia Tengah) Bali, south/east Kalimantan,
Sulawesi, Nusa Tenggara.
GMT +9: Eastern Indonesian Time (WIT, Waktu Indonesia Timur) Maluku, Papua.
I.3 Demography
In 2018, Indonesia has more than 265 million populations. The population is unevenly spread throughout
the islands within a variety of habitats and levels of development, ranging from the megalopolis of
Jakarta to tribes in Papua Provinces are usually grouped around larger islands and include smaller
surrounding islands. Indonesia also has the world's largest Muslim population. Ethnically it is highly
diverse, with more than 300 local languages. The people range from rural hunter-gatherers to a modern
urban elite. To get appropriate the fixed number of population, Indonesia government carries out
population census every ten years.The table below shows the distribution of populations from 1971 until
2010 by provinces:
Table 2: Distribution of Population
Province
Aceh
Sumatera Utara
Sumatera Barat
Riau
Jambi
Sumatera Selatan
Bengkulu
Lampung
Kepulauan Bangka Belitung
Kepulauan Riau
DKI Jakarta
Jawa Barat
Jawa Tengah
DI Yogyakarta
Jawa Timur
BantenBali
Nusa Tenggara Barat
Nusa Tenggara Timur
Kalimantan Barat
Kalimantan Tengah
Kalimantan Selatan
Kalimantan Timur
Sulawesi Utara
Sulawesi Tengah
Sulawesi Selatan
Sulawesi Tenggara
Gorontalo
Sulawesi Barat
MalukuMaluku Utara
Papua Barat
Papua
INDONESIA

1971
2,008,595
6,621,831
2,793,196
1,641,545
1,006,084
3,440,573
519,316
2,777,008
4,579,303
21,623,529
21,877,136
2,489,360
25,516,999
2,120,322
2,203,465
2,295,287
2,019,936
701,936
1,699,105
733,797
1,718,543
913,662
5,180,576
714,120
1,089,565
923,440
119,208,229

1 980
2,611,271
8,360,894
3,406,816
2,168,535
1,445,994
4,629,801
768,064
4,624,785
6,503,449
27,453,525
25,372,889
2,750,813
29,188,852
2,469,930
2,724,664
2,737,166
2,486,068
954,353
2,064,649
1,218,016
2,115,384
1,289,635
6,062,212
942,302
1,411,006
1,173,875
147,490,298

Population
1 990
1 995
3,416,156
3,847,583
10,256,027
11,114,667
4,000,207
4,323,170
3,303,976
3,900,534
2,020,568
2,369,959
6,313,074
7,207,545
1,179,122
1,409,117
6,017,573
6,657,759
8,259,266
9,112,652
35,384,352
39,206,787
28,520,643
29,653,266
2,913,054
2,916,779
32,503,991
33,844,002
2,777,811
2,895,649
3,369,649
3,645,713
3,268,644
3,577,472
3,229,153
3,635,730
1,396,486
1,627,453
2,597,572
2,893,477
1,876,663
2,314,183
2,478,119
2,649,093
1,711,327
1,938,071
6,981,646
7,558,368
1,349,619
1,586,917
1,857,790
2,086,516
1,648,708
1,942,627
179,378,946
194,754,808

4

2 000
3,930,905
11,649,655
4,248,931
4,957,627
2,413,846
6,899,675
1,567,432
6,741,439
900,197
8,389,443
35,729,537
31,228,940
3,122,268
34,783,640
8,098,780
3,151,162
4,009,261
3,952,279
4,034,198
1,857,000
2,985,240
2,455,120
2,012,098
2,218,435
8,059,627
1,821,284
835,044
1,205,539
785,059
2,220,934
206,264,595

2 010
4,494,410
12,982,204
4,846,909
5,538,367
3,092,265
7,450,394
1,715,518
7,608,405
1,223,296
1,679,163
9,607,787
43,053,732
32,382,657
3,457,491
37,476,757
10,632,166
3,890,757
4,500,212
4,683,827
4,395,983
2,212,089
3,626,616
3,553,143
2,270,596
2,635,009
8,034,776
2,232,586
1,040,164
1,158,651
1,533,506
1,038,087
760,4222,833,381
237,641,326

Source: Indonesia Statistics, 2018

The Indonesian archipelago has been an important region for trade since at least the 7th century,
when Srivijaya and then later Majapahit traded with China and India. Local rulers gradually absorbed
foreign cultural, religious and political models from the early centuries CE, and Hindu and Buddhist
kingdoms flourished. From this point onward, dozens of kingdoms and civilizations flourished and fadedin different parts of the archipelago. Some notable kingdoms include Sriwijaya (7th-14th century) on
Sumatra and Majapahit (1293-c.1500), based in eastern Java but the first to unite the main islands ofSumatra, Java, Bali and Kalimantan as well as parts of Peninsular Malaysia. Indonesia also consists ofhundreds of distinct native ethnic and linguistic groups, with the largest and politically dominant ethnic
group being the Javanese. In a numerical scale, the largest ethnic groups are the Javanese (45%) from
central and eastern Java, the Sundanese (14%) from western Java, the Maduranese (7.5%) from theisland of Madura, and Coastal Malays (7.5%), mostly from Sumatra. This leaves 26% for the Acehnese
and Minangkabau of Sumatra, the Balinese, the Iban and Dayaks of Kalimantan, and a bewildering
patchwork of groups in Nusa Tenggara and Papua.
Religion, does play a very important role in Indonesian society. Indonesian nationals are obliged toadhere to one of the religions that have been selected by the government (Islam, Christianity,
Catholicism, Hinduism, Buddhism and Confucianism). Islam is a majority religion in Indonesia.
Indonesia also has the world's largest Muslim population. Approximately 87.2 percent of the total
Indonesian population or 207.2 million individuals in absolute numbers - is Muslim. However,Indonesia is not an Islamic nation (only in the special region of Aceh on the northern tip of Sumatra
Islamic Sharia law is being applied). But despite being a secular democracy, principles based on Islamic
doctrine do play a large role in the politics, the economy and society of Indonesia. There are also some
16.5 million Protestants (6.9 percent of the total population), 6.9 million Catholics (2.9 percent of the
population), and 4 million Hindus (1.7 percent) living in Indonesia. Lastly, there exist small minorities
of Buddhists as well as those who practice Confucianism, mostly members of the ethnic Chinese
community.
I.4 Government and Political Situation
The Indonesian governmental system consists of three branches, executive branch, legislative branch,and judicial branch. The executive branch consists of the president, the vice president and the cabinet.
Both the president and vice president are chosen by the Indonesian electorate through presidential
elections. They serve for a term of five years that can be extended once by another term of five years
when re-elected by the people. During these elections the president and vice president run as a fixed,
inseparable pair, which implies that the composition of this pair is of great political strategic importance.
Important matters that are of influence include ethnic (and religious) background and (previous) social
position in Indonesian society.
Indonesia's legislative branch is the People’s Consultative Assembly (MajelisPermusyawaratan
Rakyat, abbreviated MPR). It has the power to set or change the Constitution and appoints (orimpeaches) the president. The MPR is a bicameral parliament that consists of the People’s
Representative Council (DewanPerwakilan Rakyat, abbreviated DPR) and the Regional Representative
Council (DewanPerwakilan Daerah, abbreviated DPD).
The DPR, consisting of 560 members, draws up and passes laws, produces the annual budget incooperation with the president and oversees the general performance of political affairs. It is elected fora five-year term through proportional representation based on general elections. The DPD deals withbills, laws and matters that are related to the regions, thus increasing regional representation at thenational level. Every Indonesian province elects four members to the DPD (who serve for a five-yearterm) on non-partisan basis. As Indonesia contains 33 provinces, the DPD consists of a total of 132
members.
The highest court in Indonesia's judiciary system is the independent Supreme Court. It is the final

5

court of appeal and also deals with disputes between lower courts. A relatively new court, establishedin 2003, is the Constitutional Court, which monitors whether decisions made by the cabinet andparliament (MPR) are in line with the Indonesian Constitution. However, most of the legal cases inIndonesia are handled by the public courts, administrative courts, religious courts and military courts.
A Judicial Commission oversees the maintenance of honor, dignity and behavior of Indonesian judges.

6II. Overview of Macroeconomics Activity and Fiscal Position

II.1 Macroeconomic Activity
Home to more than 260 million people, Indonesia is the fourth most populous country in the world andthe largest economy in Southeast Asia. With GDP of about US$1 trillion, the country is the world’s
sixteenth largest economy and the seventh largest in purchasing-power-parity terms. It has played anincreasingly prominent role in the global policy debate, including as a member of the Association ofSoutheast Asian Nations (ASEAN) and the Group of 20 (G20), an international forum bringing together
20 of the world’s largest advanced and emerging market economies.
Indonesia economy has passed various conditions from different era. There were some obstacles andachievements that Indonesia got it. Indonesia economy activities have been started since from colonial
era until now. Many steps and policies have been implemented.
In colonial times, Indonesia economy resource was only developed in the interest of colonizers
through the concentration on agriculture, especially plantations, with most of product sold abroad. As aresult, the structure of the Indonesia economy became unbalanced because of too great an emphasis on
the heavily export-import oriented agriculture.
During the decade knows as Old Order Era (1945-1966), the economy was a servant to politics.
Rational Economic principles were unacknowledged and ignored. Furthermore, domestic and foreign
resources were squandered. The direct result of these conditions was a drastic decline in the economy,
accompanied by hyperinflation which reached more than 600 per cent in 1966. During this period, foodproduction did not keep pace with population growth. Export proceeds decreased significantly, while
imports were paid for by increasing loans from abroad.
Monetary policy received greater attention when the New Order Government came into the power.
A new Bank Indonesia Act was stipulated in 1968 with multiple objectives, namely, to achieve andmaintain price stability, stimulate economic growth and create employment. The monetary policy
focused on controlling inflation and coordinating with fiscal authority to achieve economy stability.
Inflation could finally and drastically be controlled to below 10 per cent in 1969. Thereafter, between
1969 and 1981, economic growth averaged about 7.86 per cent, with high revenue coming mainly fromoil exports.
The first financial liberalization took place in June 1983. At this time the direct monetary policy was
replaced with an indirect monetary policy through an open market operation using Bank Indonesia
Certificate (Sertifikat Bank Indonesia) as its main instrument and couple with intervention in money
market when necessary. To achieve the multiple objectives stated before, Bank Indonesia implemented
a base money (quantity) targeting framework. Further deregulation took place in October 1988, when
the reserve requirement was significantly reduced from 15 per cent to 2 per cent and restrictions on
permits to open new banks were eased. Since then, the banking sector has grown rapidly to participate
as an agent of development. As a result, short-term capital could flow freely in and out of the country
and exposure to foreign exchange risk increase while the financial sector and real sector decoupled.
Consequently, controlling supply money become complex.
The 1997-1998 Asian Financial Crisis hit Indonesia through a contagion effect from the currency
crisis in Thailand in July 1997. This crisis struck Indonesia’s economy so hard that it led to both a triple
financial crisis (currency, banking and foreign debt) and political crisis. As a monetary authority, Bank
Indonesia initially responded by adopting a free floating exchange rate regime. Previously, Bank
Indonesia had adopted a managed floating exchange rate regime. However, the government decided toturn to the IMF for help and entered into a Standby Arrangement with it on November 5th 1997. Later,on August 25th 1998, this was stepped up and became known as an Extended Fund Facility. The table7

below shows condition in some countries when Asian Financial Crisis happened:
Table 3: Asian Financial Crisis Outlook
Country

Year

Type Of Crisis

Indonesia
Korea
Malaysia
Philippines
Thailand
Vietnam

1997
1997
1997
1997
1997
1997

Banking, Currency, Debt
Banking, Currency
Banking, Currency
Banking, Currency
Banking, Currency
Banking, Debt

NPL
(%)
32.5
35.0
30.0
20.0
33.0
35.0

Fiscal Cost(% GDP)
56.8
31.2
16.4
13.2
43.8
10.0

Output Loss(% GDP)
67.9
50.1
50.0
0.0
97.7
19.7

Growth
(%)
-13.1
-6.9
-7.4
-0.6
-10.5
4.8

To tackle impact of Asian Financial Crisis, Indonesia’s government implemented some policies.
Period 1997-1999, monetary authority under Monetary Board chaired by Minister of Finance with
Governor of Bank Indonesia took actions to handle this condition. In 1999, inflation dropped to 1.92 %,economic growth improved to positive 0.3 %. In 2000, inflation increased to 9.35 % and economic
growth improved further to 4.9 %. The table below shows what Monetary Policies that launched byIndonesia Authority in 1997-1999:
Table 4: Indonesia Monetary Policy 1998
Economic Conditions● Overheated economy● Structural Weaknesses● Foreign debt was not be hedged● Contagion effect started from currency crisis
In Thailand in July 1997
● Banking distress : NPL increased, margin,
ROA, and CAR became negative● Bank runs in November 1997
Economic Conditions● Budget Deficits● Public Debt US$ 60 billion
Economic Conditions● Speculation/rush in foreign exchange
Market caused IDR to fall since August
1997

Monetary Policies● Tight money policy● Closing of 16 hopeless ailing bank on
November 1st 1997 (before implementing
Blanket Guarantee)● Letter of Intent with IMF:
- Blanket Guarantee in January 1998
- Bailout other ailing banks- Aggressively raising interest rate
● Banking Act 1998 : Central Bank Act 1999
Monetary Policies● Cutting back government spending● Structural reform
Monetary Policies● Widen intervention band in July 1997
● Floating exchange rate regime in August
1997

Indonesia’s economy started to recover in 1999, indicated by declining inflation and stronger rupiah,
which provided room for a phased reduction of interest rate. Significant progress was also recorded in
the restructuring of bank and external debts, especially those of banks and government. With positive
hindsight, it can be seen that the stock market was bullish, signaling an initial return of investor
confidence in Indonesia’s economy prospect. However, the process of economic stabilization andrecovery in Indonesia was, in fact, slower than that in other Asian countries in crisis.
As a result, a new Central Bank act No. 23 of 1999 entered into force in 1999, when Bank Indonesia
became an independent central bank, which focused on a single objective, which was to achieve andmaintain IDR (Indonesia Rupiah) stability. The new Bank Indonesia Act of 1999 made a fundamental
change in the conduct of monetary policy from multiple objectives using quantity targeting to single
objective using price targeting, known as Inflation Targeting Framework (ITF). To further refine theefficacy of monetary management, the Bank Indonesia act of 1999 amended in 2004. Initially, Bank
Indonesia implemented light ITF. Later, however, in July 2005, it implemented a full-fledged ITF, as a
response to aftermath of structural changes where interest rates started to take on an increasingly
important role (compared with money supply) in influencing inflation.
In July 2007, the global economy witnessed a financial crisis precipitated by the subprime mortgage
crisis in the US banking system. The situation worsened in 2008, with oil price soaring up to more than
US$ 100 per barrel, which further escalated to US$ 147 per barrel in July 2008 but soon after that. The
crisis was first transmitted to Indonesia through the capital market. The composite stock index started

8around 2,700 in December 2007 become 1,241 in November 2008. The ownership share of foreign
investor decreased significantly that started 66.3 % in December 2007 become 63.2 % in August 2008.
In October 2008, Indonesia’s currency also was depreciated by US dollar. Indonesia Rupiah (IDR) was
brought down to IDR 10,995 to the US Dollar and continued to weaken further to IDR 12,151 in
November 2008. As an independent monetary authority, Bank Indonesia has single objective forachieving and maintaining the stability of the rupiah by taking into account the general economic
policies of the government. In 2009, the result of monetary policy were Inflation dropped to 2.78 %,GDP growth reached 4.4 %, Interest rate lowered to 6.5 %, strong exchange rate at IDR 9,300/US$ 1
and Unemployment decreased to 9.0 %.
Table 5:Indonesia Monetary Policy 2008
Economic Conditions● Global Financial Crisis started in July 2007
● Stock Market index started to slide since
03/2008; oil price continued to increase
Drastically and reach US$ 147 in July 2008
● Global banking systemic contagion
Worsened in September 2008; tight liquidity
Problem in the banking system● Inflation pressure lessened in September
2008; many central banks started to lower
their policy rates
Economic Conditions● Fiscal sustainability pressure since early
2008; increased cost of subsidies

Economic Conditions● Capital outflow since early 2008
● Depreciation to IDR 12, 150/US$ 1 inNovember 2008; increased volatility

Monetary Policies● Tight monetary policy; gradual Bank
Indonesia rate increase since May 2008
● Eased statutory reserve requirement andFacilitating Short Term Financing for Banks
That have low Capital Adequate Ratio● BI rate increased 25 basis points in October
2008 and kept unchanged in November 2008
● Bailout one troubled small bank in
November 2008
● Eased Monetary Policy aggressively from
December 2008 until early 2010
Monetary Policies● Budget tightening by 10 % in 2008;
Decreased subsidy; raised gas price in
May 2008● Increased minimum deposit insurance
20 times● Established Financial System Stability
Committee (Finance Minister and Bank
Central Governor) and necessary regulations● Bilateral Currency Swap with China andJapan● Lowered gas price in December 2008
Monetary Policies● Stabilization policy in Foreign Exchange
Market

The government responded to the crises of 1998 and 2008 in different ways. The IMF recommended
that BI respond to the weakening of the rupiah by raising interest rates during the Asia Financial Crisis.
Because NPLs were high, raising interest rates increased the probability of default, which led to thebanking crisis. The banking crisis worsened the economy and encouraged capital outflows. This isconsistent with Stiglitz and Greenwald’s (2003) argument that as an economy enters a deep recession
and contraction devaluation causes many firms to be distressed. In contrast with the AFC, during the
global financial crisis, BI responded by lowering the interest rate and ensuring that there was enoughliquidity in the financial system. As a result, the probability of default was relatively low in 2008, andthe impact of NPLs on the banking sector was also relatively small.
Amid the positive momentum on multiple fronts, challenges emerged that hampered the pace ofdomestic economic recovery. These challenges were rooted in cyclical and structural problems, bothglobal and domestic. To add to the complexity of the challenges, the Indonesian economy wassimultaneously undergoing an adjustment phase in response to changes in the global and domestic
environment. Taken together, these conditions held the domestic economy back from mounting a quick,robust recovery.
Indonesia’s economic recovery progressed gradually and at the same time became more stable.
Economic growth edged upwards and the structure of growth was seen in the second half of the year.
Growth in 2017 was recorded at 5.07%, up slightly from 5.03% in 2016. Macroeconomic stability was9also well in hand, with inflation remaining within the target range, a prudent current account deficit level
and a sufficiently stable exchange rate. Financial system stability was also carefully maintained, despite
unresolved challenges relating to the still-limited performance in banking intermediation.
Four main cyclical challenges impeded economic recovery in 2017. First, the normalization ofmonetary policy by some advanced nations presented a challenge. Global financial markets were
influenced by the direction of this monetary policy normalization, most importantly that undertaken by
the United States. Even though markets were generally prepared for it, pressure on global financial
markets did intensify at the end of the third quarter of 2017 as the US dollar strengthened over nearly
every other currency. This pressure exacerbated uncertainty on global financial markets and in capital
flows and threatened to rein in a more rapid global recovery, including in Indonesia. This became achallenge which given the risk that normalization in advanced nations could cause instability bytriggering a capital reversal from emerging markets, including Indonesia. Second, the limited domestic
fiscal space posed a challenge. It limited the Government’s capacity to create economic stimuli and toleverage positive momentum for the benefit of the domestic economy. The lack of a sizeable stimulus
is explained in part by below-target taxation. In 2017, the tax ratio came to 9.9% of GDP, representing
a decline compared to the preceding two years; the tax-to-GDP ratio in 2015 was 10.7% and in 2016
edged down to 10.4%. The capacity of fiscal stimulus to give a strong boost to the economic recovery
was therefore limited, as evident in the dynamics of government financial operations during 2017. Third,
domestic corporate consolidation had not yet fully run its course, though it is now winding down. During
this period of consolidation, companies generally did not expand, but instead were focused on putting
their house in order. Corporate behavior was also influenced by adverse global developments in 2016that damaged corporate confidence and discouraged them from expanding. In addition, corporate
expansion plans were stifled by the modest fiscal stimulus and the still-sluggish household consumption.
At the same time, bank intermediation underperformed, hitting corporate business financing and in turnimpacting on corporate expansion. These factors led to inadequate levels of domestic non-construction
investment, particularly in the first half of 2017. This was cause for concern because incorrect handling
could have hampered the recovery process. For these reasons, short-term measures were taken to boost
the confidence of domestic economic actors at a time when Indonesia was receiving positive recognition
from abroad for the improvement in its economic fundamentals. Fourth, as noted above, banking
intermediation had not fully recovered, limiting the driving force of the economy. Slackness in credit
growth was the result of both demand- and supply-side factors. On the demand side, the incomplete
corporate consolidation slowed business expansion and therefore also demand for credit. At the sametime, banks remained cautious and selective in extending new loans and continued to apply high lending
standards.
II.1.1 Policy Response in 2017
Macroeconomic policy responses in 2017 aimed to optimize the momentum for recovery, while
reinforcing the economy at a structural level. To this end, the policy synergy forged in 2017 by Bank
Indonesia, the Government and the Financial Services Authority (OJK) targeted three key areas. First,
policies sought to mitigate cyclical risks from the global and domestic environment in order to safeguard
macroeconomic and financial system stability as a basis for building economic growth. Second, policies
were aimed at accelerating the completion of the domestic economic consolidation process in order topromote economic recovery. Third, policies were designed to correct a range of structural problems inthe domestic economy. At the national level, the macroeconomic policy management responses were
pursued through synergy that brought together fiscal, monetary, macro and micro prudential andstructural reform policies, including in the payment system and currency management.
The Government pursued a fiscal policy focused on stimulating the economy while safeguarding the
fiscal sustainability outlook. In this regard, the thrust of the strategy for the state budget was threefold
namely: optimizing revenues, improving the quality of expenditure and managing financing efficiently
and sustainably. To this end, government spending was allocated to productive sectors, efficiencies weremade in non-priority spending and a better fiscal balance between the central government and theregions was encouraged. This strategy was marked by increased infrastructure spending, which reached1019.4% of the state budget in 2017. This represents a twofold increase compared with 2013 –before statesubsidies were reformed and infrastructure was accounted for only 9.4% of the state budget.
The strategy of increasing infrastructure expenditure was balanced with short-term stimuli that would
immediately support the domestic economic recovery. The Government increased the budget fornational priority and social safety net programs; social assistance was increased to IDR55.3 trillion, 11.5%
higher than realized spending in 2016. At a practical level, more of the social assistance was disbursed
during the second half of 2017, a factor that helped spur consumption during that period.
Efforts to create greater space for fiscal stimulus were, however, impeded by underperforming tax
revenues. In 2017, tax revenues came in below the targets set in the 2017 Revised State Budget.
Consequently, overall government spending was reined in to safeguard fiscal sustainability. This
strategy ensured the 2017 fiscal deficit remained at a prudent and safe level of 2.5% of GDP, below therevised target of 2.9% of GDP. The deficit was financed by issuing government securities and by foreign
debt. To improve the efficiency of financing, the Government carefully managed the denomination,
timing and tenor of issuances of government securities. Accordingly, official debt was maintained at alow, prudent level of 29.2% of GDP.
Bank Indonesia’s exchange rate policy sought to keep movement in the rupiah in line with
fundamentals by promoting the operation of market mechanisms. Exchange rate policy was reinforced
by improvements in the foreign exchange supply and demand structure, mandatory use of the rupiah inIndonesian national territory and the Implementing Activities for Prudential Principles (KPPK) for
external debt management. These principles include the obligation for non-bank corporate with external
debt exposure to comply with the hedging ratio, the minimum liquidity ratio and the minimum credit
rating. This regulation is intended to mitigate exchange rate risk, liquidity risk and over leverage risk
relating to external debt obligations. Bank Indonesia also expanded the range of instruments available
on the foreign exchange market by issuing financial instruments in non-US dollar currencies. In addition,
Bank Indonesia also promoted the use of local currency settlement (LCS) in trading transactions in orderto reduce dependence on one particular currency. Exchange rate policy was also bolstered bystrengthening of external sector resilience through adequate levels of international reserves, the first lineof defense. Further, the role of the international financial safety net as the second line of defense was
expanded.
Indonesia’s economic growth improved gradually in 2017, but with recovery at a slow pace. In 2017,
GDP growth was recorded at 5.07%, up slightly from the 2016 growth of 5.03%. GDP expansion was
mainly evident in the second half of 2017, buoyed by exports and investment. Exports increased by a
substantial margin, driven by the positive momentum in the world economy. This strengthening inexternal demand contributed to an easing of the corporate consolidation process and created space forcorporations to expand. Brisk investment also received impetus from the fiscal stimulus, particularly inthe second half of 2017 when work moved forward on various infrastructure projects. The increase inexports and investment, however, did not have an optimal effect in accelerating value creation in thedomestic economy because, as in the past, some of this increase was offset by imports.table below shows
Indonesia Domestic Indicators since 2015 until 201711

Table 6: Indonesia Domestic Indicators 2015-2017
Component
2015
2016
2017
Economic Growth (%, yoy)
4.88
5.03
5.07
Household Consumption (%, yoy)
4.96
5.01
4.95
Government Expenditure (%, yoy)
5.32
-0.14
2.14
Investment (%, yoy)
5.01
4.47
6.15
Building Investment (%, yoy)
6.11
5.18
6.24
Non-Building Investment (%, yoy)
1.93
2.43
5.9
Export (%, yoy)
-2.12
-1.57
9.09
Import (%, yoy)
-6.25
-2.45
8.06
CPI Inflation (%, yoy)
3.35
3.02
3.61
Core Inflation (%, yoy)
3.95
3.07
2.95
Volatile Food Inflation (%, yoy)
4.84
5.92
0.71
Administered Price Inflation (%, yoy)
0.39
0.21
8.70
Indonesia Balance of Payment
Current Account Deficit (% GDP)
2.0
1.8
1.7
Overall Balance (Billion US$)
-1.1
12.1
11.6
Reserve Assets (Billion US$)
105.9
116.4
130.2
Exchange Rate (Average, Rp/US$)
13,392
13,305
13,385
Jakarta Composite Index (JCI)
4,593
5,297
6,356
Government Bond Yield 10 years (%)
8.76
7.97
6.32
Banking
Total Credit (%, yoy)
10.4
7.9
8.2
CAR (end of period, %)
21.2
22.7
23.0
NPL (end of period, %)
2.5
2.9
2.6
State Budget
Tax (%GDP)
10.7
10.4
9.9
State Budget Deficit (% GDP)
2.6
2.5
2.5
Source: Indonesia Statistic 2018, Bank Indonesia, Ministry of Finance, Financial Service Authority and Indonesia Stock
Exchange

The recovery in the domestic economy had a positive impact on the quality of growth, which was
accompanied by declining unemployment and a fall in poverty, albeit with a relatively flat Gini ratio.
With the onset of improvement in the economy, unemployment eased slightly to 5.5% in August 2017versus 5.6% in August 2016. The decline in unemployment is explained in part by advancements indigital technology. Its widespread use in economic activities created more job opportunities andprovided a buffer against the downturn in formal employment in leading sectors, such as agriculture,mining and construction. This shift in employment also led to improvement in poverty figures. In 2017,
the proportion of citizens living in poverty was recorded at 10.1%, representing an improvement over
10.7% in 2016. There was only limited amelioration of disparities, however, as evident from the Gini
ratio that reached 0.391 or only slightly below the 2016 level of 0.394.
II.1.2 International Environment
In general, the policy responses of most countries were oriented towards accelerating the economic
recovery and maintaining momentum, while taking into account local dynamics. In terms of monetary
policy, several advanced economies gradually sought to normalize in response to the solid economic
recovery and the rising inflation outlook. Meanwhile, most emerging market economies (EMEs)
adopted monetary policy easing to support the economic recovery. The table below shows the World
Economic Growth by Representative of Advanced Countries and Emerging Countries:

12

Table 7: World Economic Growth by Representative of Advanced and Emerging Countries( %)GROUP OF COUNTRIES
Major Industrial Countries
USA
Euro Area
Germany
FranceItaly
Japan
United Kingdom
CanadaSelected European Countries
RussiaTurkeyAsia
People's Republic of China
South Korea
Hong Kong SAR
Taiwan, Province of China
India
ASEAN-5 Countries
Indonesia
Malaysia
Philippines
Singapore
ThailandAustralia
Central and South America
Argentina
BrazilMexicoSouth Africa
Source: Bank Indonesia, 2018

2015

2016

2017

2.90

1.60

2.20

1.30
1.00
0.92
1.38
2.30
1.01

1.90
1.20
1.15
0.98
1.80
1.41

2.80
2.80
1.57
1.78
1.70
3.05

-2.50
5.92

-0.20
3.22

1.50
7.36

6.90
2.80
2.40
0.81
7.40

6.70
2.90
2.20
1.41
8.20

6.90
3.10
3.80
2.89
7.10

4.88
5.10
6.10
-0.52
3.00
2.48

5.03
4.20
6.90
-0.53
3.30
2.58

5.07
5.90
6.70
0.59
3.90
2.23

2.73
-3.54
2.60
1.35

-1.82
-3.46
2.30
0.55

2.85
0.99
2.00
1.30

On the fiscal side, many advanced and EME governments played a dominant role in stimulating the
economy, although some countries were unable to do this as they lacked the fiscal space. The global
recovery also prompted structural reforms aimed at enhancing productivity, overcoming labor market
constraints and increasing future economic growth. In addition, international cooperation played a keyrole in achieving robust, sustained, balanced, inclusive and resilient economic growth.
In the years before the Asian Financial Crisis, Indonesia appeared to be distinctly outward looking.
Economic reforms accelerated in the 1980s—spurred by oil price volatility and the recognition of theeconomy’s acute dependence on oil and other commodities—spanning trade, banking, investment, andcapital account liberalization and the hallmarks of globalization. Foreign investors, attracted by strong
fundamentals, including robust growth, low inflation, and the promise of commodity wealth, funded
external deficits via long-term foreign direct investment (FDI) and banking flows. Growth was strong,
averaging 7.3 percent per year in 1987–97. Cross-border trade and financial links, while not accelerating
quite as rapidly as in the Asian Tigers, rose steadily through the 1990s.
With the onset of the Asia Financial Crisis in 1997, Indonesia began a striking turnaround.5 However,the country’s trade and financial exposure did not follow the strong recovery and robust growth that
occurred after the crisis. As a result, in relation to the size of its economy, Indonesia’s trade and financial
integration with the world steadily declined.
The strengthening pace of global economic recovery in 2017 saw global GDP growth rise to 3.7% in2017 from 3.2% in 2016. A faster pace of recovery in the advanced economies and ongoing recovery indeveloping economies supported this global growth, with the sources of growth expanding fromconsumption to investment. This stronger investment stimulated growth in world trade volumes, which
increased to 4.5% in 2017 from just 1.5% in 2016. This in turn prompted international commodity prices
rise, particularly energy and metals. These positive global developments improved the dynamics of13

global financial markets, as did the reduction in risks in comparison with 2016.
Most policy responses were aimed at building momentum in the economic recovery and ensuring it
was sustainable, while taking into account local dynamics and challenges. The majority of advanced
economies, including Japan, maintained their accommodative monetary policies, underpinned by fiscal
stimuli and structural reforms. Nonetheless, some advanced economies, including the United States,
began to gradually normalize monetary policy. The role of fiscal stimulus in advanced economies has
expanded, because there is little room to maneuver within the sphere of the accommodative monetary
policy. On the other hand, emerging market economies maintained their accommodative monetary
policies, bolstered by increasing fiscal stimulus. In addition, both advanced and developing economies
continued to implement structural reforms to foster sustainable economic growth in the long term.
The policy responses in emerging economies included a mix of monetary, fiscal, and structural
policies. In terms of monetary policy, emerging economies generally adopted an accommodative policy
stance, with most reducing their policy rate in response to controlled inflation and restrained economic
recoveries. This was seen in Brazil, Russia, Colombia, Peru, and Indonesia.In contrast, other emerging
economies, including Mexico and Turkey, opted to raise their policy rates in response to inflationarypressures coming from exchange rate depreciation. On the fiscal front, emerging economies generally
maintained an expansionary policy, while structural policies were aimed at boosting productivity in themedium to long term.
International cooperation strengthened in 2017 to optimize the global economic recovery andreinforce economic resilience. International cooperation was realized through the G20 Forum,
International Monetary Fund (IMF) and Bank for International Settlements and Chiang Mai Initiative
Multi lateralization (CMIM). At the G20, cooperation to build on the momentum in the global economic
recovery manifested in a commitment to stimulate strong, sustained, balanced and inclusive growth. The
IMF emphasized the importance of monetary policy, fiscal policy and structural reforms to maintaineconomic growth momentum. Meanwhile, efforts to strengthen economic resilience were realized
through: agreement concerning the Note on Resilience Principles for G20 Economies, strengthening the
Global Financial Safety Net (GFSN), including through the CMIM and increasing oversight of financial
technology development at various international forums.
Economic and financial sector resilience has also been strengthened in ASEAN by the regionalgrouping’s ongoing financial sector integration. ASEAN aims for economic integration in 2025 – theASEAN Economic Community – particularly in the financial channel, and has set a strategic action planfor financial integration in 2025. In 2017, ASEAN compiled key performance indicators to evaluate theprogress towards financial integration. These indicators are divided into three sections – financial
integration, financial inclusion, and financial stability.
The policy priorities for Indonesia and the other ASEAN-5 (Indonesia, Malaysia, Singapore,
Philippines and Thailand) economies include enhancing resilience to external shocks, rebuilding orprotecting policy buffers, and addressing bottlenecks to growth. To enhance resilience, these economies
should diversify their exports and trading partners and reduce external vulnerabilities such as highcurrent account deficits, large external debt, or currency and maturity mismatches in the domestic
financial market. Policy buffers should be protected or rebuilt to increase the room for maneuver in
response to external shocks. These adjustments include lowering fiscal deficits and public debt,
enhancing the transmission of monetary policy, and modernizing the macro prudential framework.
Countries should also tackle bottlenecks to growth by improving infrastructure and education quality
and streamlining regulations to enhance the business climate and promote domestic sources of growth.
II.1.3 Indonesia Balance of Payment (BOP)The balance of payments (BOP), also known as balance of international payments, summarizes alltransactions that a country's individuals, companies and government bodies complete with individuals,
companies and government bodies outside the country. These transactions consist of imports and14

exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances.
Balance of payments and international investment position data are critical in formulating national andinternational economic policy. Certain aspects of the balance of payments data, such as payment
imbalances and foreign direct investment, are key issues that a nation's policymakers seek to address
The global economic recovery and growing optimism concerning the domestic economic outlook
strengthened Indonesia’s balance of payments (BOP) in 2017. The BOP recorded another surplus in
2017, backed by a healthy current account and an influx of foreign capital flows in the form of asignificant capital and financial account surplus. The current account deficit fell to 1.7% of GDP in 2017,
down from 1.8% of GDP in 2016, as exports increased to meet global demand and internationalcommodity prices rose. Nevertheless, the export gains still relied on commodity based exports, while
manufacturing export growth was restrained. At the same time, rising imports were subdued given theslow nature of the domestic economic recovery. Meanwhile, the capital and financial account recorded
a significant surplus, driven by a sharp increase of nonresident capital inflows in the form of direct
investment and portfolio investment
Such dynamics confirmed the favorable perception of non-resident investors concerning the domestic
economy, leading to an increase of placements in Indonesia. BOP performance has effectively
reinforced external sector resilience, with several of the relevant indicators improving on their positionsin the previous year. Furthermore, the BOP surplus nudged-up the position of international reserves to
US$130.2 billion in 2017, representing an all-time high for Indonesia. This position of international
reserves was equivalent to 8.6 months of imports or 8.3 months of imports and servicing of government
external debt, well above the international standard of three months. The basic balance also registered asurplus in 2017, reversing the deficit recorded in 2016, in line with the controlled current account deficit
and the increasing sources of long-term financing. External debt indicators were also sound, with theexternal debt-to-GDP ratio remaining within a safe threshold at 34.7%, relatively stable on the 34.3%
posted in 2016 and consistent with other peer countries. The composition of external debt was also sound,with long-term external debt dominating at 86.1% of the total. The table below shows Indonesia’sBalance of Payment from 2015 until 2017:
Table 8: Indonesia’s Balance of Payment 2015-2017(million US$)
ITEMS

2015
-17,519
14,049149,124-135,076
13,319147,725-134,406
19,023
130,541-111,518-5,703
17,184-22,887
730
1,400
-670
-8,69722,221-30,918-28,379
2,822-31,201
5,508
10,362-4,85317
17
16,843-21,489
38,332

I. Current Account
A. Goods- Exports, fob- Imports, fob
1. General Merchandise- Exports- Imports
a. Non-Oil and Gas- Exports- Imports
b. Oil and Gas- Exports- Imports
2. Other Goods- Exports- Imports
B. Services- Exports- Imports
C. Primary Income- Receipts- Payments
D. Secondary Income- Receipts- Payments
II. Capital Account- Receipts- Payments
III. Financial Account- Assets- Liabilities

15

2016
-16,952
15,318144,470-129,152
14,744
143,105-128,360
19,516130,188-110,672-4,772
12,916-17,688
574
1,365
-792
-7,08423,324-30,407-29,647
4,048-33,695
4,460
9,832-5,37141
41
29,30615,92013,3862017-17,307
18,785
168,854-150,069
17,886
166,973-149,087
25,236
151,400-126,164-7,34915,573-22,922
899
1,881
-982
-7,834
24,794-32,628-32,756
6,550-39,306
4,498
9,990-5,49346
46
29,356-18,236
47,592

1. Direct Investment
a. Assetsb. Liabilities
2. Portfolio Investment
a. Assetsb. Liabilities- Public Sector- Private Sector
3. Financial Derivatives
4. Other Investment
a. Assetsb. Liabilities- Public Sector- Private Sector
IV. Total (I + II + III)
V. Net Error and Omissions
VI. Overall Balance (IV + V)
VII. Reserves and Related Items ³
A. Reserve Asset Transactions
B. Credit and Loans with IMF
C. Exceptional Financing
Memorandum:- Reserve Assets Position
In Months of Imports & Official Debt Repayment- Current Account (% GDP)- Debt Service Ratio (%)
O/w Government & Monetary Authority DSR (%)

10,704-9,075
19,77916,183-1,26817,451
17,38665
20-10,064-11,812
1,748
-190
1,938
-659
-439
-1,098
1,098
1,098
-

16,136
11,594
4,542
18,996
2,218
16,778
16,835-57-9-5,817
1,499-7,316-2,369-4,947
12,394-305
12,089-12,089-12,089-

19,285-2,134
21,41920,899-3,35624,25521,8802,375-128-10,700-13,187
2,488-1,353
3,840
12,095-509
11,586-11,586-11,586-

105,931
7.39
-2.03
-

116,362
8.42
-1.82
-

130,196
8.27
-1.7
-

Source: Bank Indonesia, 2018

Such dynamics confirmed the favorable perception of non-resident investors concerning the domestic
economy, leading to an increase of placements in Indonesia. BOP performance has effectively
reinforced external sector resilience, with several of the relevant indicators improving on their positionsin the previous year. Furthermore, the BOP surplus nudged-up the position of international reserves to
US$130.2 billion in 2017, representing an all-time high for Indonesia. This position of international
reserves was equivalent to 8.6 months of imports or 8.3 months of imports and servicing of government
external debt, well above the international standard of three months. The basic balance also registered asurplus in 2017, reversing the deficit recorded in 2016, in line with the controlled current account deficit
and the increasing sources of long-term financing. External debt indicators were also sound, with theexternal debt-to-GDP ratio remaining within a safe threshold at 34.7%, relatively stable on the 34.3%
posted in 2016 and consistent with other peer countries. The composition of external debt was also sound,with long-term external debt dominating at 86.1% of the total.
II.1.4 Current AccountIn 2017, current account performance improved as the deficit narrowed, supported by commodity pricesthat have been rising since the middle of 2016. Consequently, the current account deficit stood at
US$ 17.3 billion in 2017, or - 1.7% of GDP, the lowest level on record in the past six years. The healthy
current account deficit was supported by a larger goods trade surplus, particularly non-oil and gas. The
non-oil and gas trade surplus soared 30.4% in 2017 on increasing export value, as internationalcommodity prices continued to rise and demand increased from Indonesia’s major trading partners.
However, the robust export gains were remained depend on commodity-based exports, although several
manufacturing products did begin to show early signs of improvement.
The surge of non-oil and gas exports spurred a narrower current account deficit, countering the
growth in non-oil and gas imports, a persistent oil and gas trade deficit, and deficits in the services andprimary income accounts. Measured increases of non-oil and gas imports was reported, however thesewere predominantly raw materials and capital goods for investment purposes, needed to feed risingexports and growing domestic demand. The oil and gas deficit widened, due to the higher global oil
price, rising fuel consumption, and declining domestic crude oil production. Meanwhile, the larger
deficits recorded in the primary income and services trade accounts stemmed from high revenue
payments on non-resident investments and freight services payments on imported goods.

16II.1.5 Trade Balance
The non-oil and gas trade balance improved in 2017, underpinned by the ongoing global economic
recovery and rising international commodity prices. Higher commodity prices strengthened the terms oftrade and raised the value of non-oil and gas exports from Indonesia, as demand grew from the country’s
major trading partners. The non-oil and gas trade surplus stood at US$ 26.2 billion in 2017, up from
US$ 20.1 billion in 2016.Dominated by crude palm oil (CPO), the increase of vegetable oil exports was
triggered by stronger CPO demand, despite rising prices. Growing demand for CPO was heightened bylower production of soybean, which is a viable substitute for CPO, due to inclement weather. Demandmainly originated from the usual major export destinations for CPO, including India, China, Pakistan
and the Netherlands. Vegetable oil exports to India went into the manufacturing sector, primarily as
cooking oil, while in China, the Government sought to maintain domestic inventories of CPO, which ituses in part as a constituent of biodiesel.
The oil and gas trade balance declined on the rising global oil price due to Indonesia’s status as a net
importer. The oil and gas trade deficit stood at US$ 7.3 billion in 2017, up from US$ 4.8 billion in 2016
with the oil trade deficit the primary contributor. The higher global oil price pushed up the value of oil
imports to Indonesia, and the growing gas trade surplus was insufficient to offset this. A wider oil trade
deficit was a key driver of the growing oil and gas trade deficit. The oil trade deficit swelled to US$ 12.8
billion in 2017 from US$ 9.7 billion in 2016, as the value of oil imports increased due to stronger
domestic demand and rising global oil prices. Oil imports were recorded at US$ 20.3 billion in 2017, up
from US$ 15.9 billion in 2016. Furthermore, fuel consumption increased 4.1% on the previous year,
primarily for transport and industry. In contrast, oil exports were subdued as lifting of crude oil fell tojust 803,000 barrels per day from 829,000 barrels per day in 2016, and as a growing portion of domestic
crude oil was used domestically by Indonesia’s refineries. However, the larger gas trade surplus curbed
the growing oil and gas trade deficit. The gas trade surplus stood at US$ 5.5 billion in 2017, up from
US$ 4.9 billion in 2016; it was boosted by higher export values of liquefied natural gas and natural gas,
as gas prices mirrored the rise in the oil price. The Table shows Indonesia’s Trade Balance since 2015
until 2017 as below:
Table 9: Indonesia’s Trade Balance 2015-2017(million US$)
ITEMS
Goods
- Exports- Imports
A. General merchandise
1. Non-oil and gas
a. Exports
b. Imports
2. Oila. Exports
b. Imports
3. Gasa. Exports
b. Imports
B. Other goods
o/w Nonmonetary gold
a. Exports
b. Imports
Memorandum:
1. Nominala. Total exports (fob)- Non-oil and gas- Oil and gas
b. Total imports (fob)- Non-oil and gas- Oil and gas
2. Growth (%, yoy)a. Total exports (fob)- Non-oil and gas- Oil and gas
b. Total imports (fob)- Non-oil and gas

17

2015
14,049149,124-135,076
13,31919,023
130,541-111,518-13,106
7,833-20,938
7,402
9,351-1,949
730
730
1,400
-670

2016
15,318144,470-129,152
14,744
19,516130,188-110,672-9,6806,267-15,947
4,908
6,649-1,741
574
574
1,365
-792

2017
18,785
168,854-150,069
17,88625,236
151,400-126,164-12,816
7,503-20,3195,467
8,070-2,604
899
899
1,881
-982

149,124
131,941
17,184-135,076-112,189-22,887

144,470
131,554
12,916-129,152-111,464-17,688

168,854
153,281
15,573-150,069-127,146-22,922-14.93-9.96-40.24-19.75-12.17-3.12-0.29-24.83
-4.39
-0.65

16.88
16.52
20.57
16.20
14.07

- Oil and gas
3. Crude oil unit prices (USD/barrel)
4. Crude oil production (million barrels per day)

-43.6048.79
0.79-22.72
39.27
0.83

29.59
51.12
0.80

Source: Bank Indonesia, 2018

II.1.6 Service Account, Primary Income Account and Secondary Income Account
The positions of the services account and primary income account deteriorated in 2017, exacerbatingpressures on the current account. The larger primary income account deficit had a larger impact on thecurrent account deficit than other components, due to the high level of revenue payments on international
direct investment. Pressures on the current account deficit also originated from a larger services accountdeficit compared with 2016, caused by freight services payments. On the other hand, the position of thesecondary income account remained relatively stable in line with steady remittances.
The primary income account deficit increased in 2017, but the revenue payment structure improved.
The primary income account deficit stood at US$ 32.8 billion in 2017, up from US$ 29.6 billion in 2016.
An increase in the position of foreign financial liabilities to meet growing demand for financing
contributed to the larger primary income account deficit. Foreign financial liabilities increased despite
competitive domestic financial returns, culminating in an uptick of revenue payments on foreign
investments. Notwithstanding the increase, the payment structure improved through an increase inreinvested earnings. Dividend payments continued to dominate the total primary income account deficit,
albeit with a declining value on the previous period. Furthermore, increasing interest payments on
government debt securities, primarily government debt securities (SUN) and global bonds also
influenced primary income account performance.
The services account deficit increased 11.0% to US$ 7.9 billion in 2017 from US$ 7.1 billion in 2016.
The larger deficit was attributed to a wider transport services trade deficit, primarily freight services
payments that correlate positively with world trade activity. Nevertheless, a higher services trade deficit
was countered by an increase in travel services receipts as the number of international travelers visiting
the Indonesian archipelago continued to soar.
The persistent transport services trade deficit in Indonesia is linked to longstanding structural issues,in particular in freight services, which must rely on foreign modes of transport, especially sea transport,
to facilitate international trade. Domestic freight services are unable to compete with their foreigncounterparts, due to a lack of supporting infrastructure, in terms of the number and quality of ships andan underdeveloped domestic shipbuilding industry. Consequently, any increase in international trade –particularly of imports, which use mostly foreign freight services – exacerbates the freight services
deficit. In 2017, goods imports grew 16.1% and freight services payments rose 13.2%. Consequently,
the ratio of freight imports to imports remains high at around 5%, while the ratio of freight exports toexports is very small at around 1% or less. In contrast, the travel services trade surplus increased in 2017as the number of international travelers visiting Indonesia increased sharply. Travel services receipts
stood at USD4.2 million in 2017, up from USD3.6 million in 2016, backed by a steep 12.3% rise in thenumber of international travelers visiting Indonesia to 12.2 million. Most international travelers in 2017
originated from China, Singapore, Australia, and Malaysia.
The secondary income account surplus was relatively unchanged from 2016 to 2017 due to a stablesurplus of remittances. While the number of Indonesian migrant workers (TKI) in the informal sector
fell slightly, the number of TKI in the formal and professional sectors rose. The total number of TKI fellslightly to 3.50 million in 2017 from 3.51 million in 2016 as a result of a moratorium put in place in
2014. The decline affected Indonesian migrant workers (TKI) in the informal sector but, in contrast,
increases were recorded in the formal and professional sectors. In addition, the average salary ofprofessional TKI increased, particularly for those working in the Asia-Pacific region. Consequently,
total remittances rose moderately to US$ 8.8 billion in 2017 from US$ 8.7 billion in 2016. However,remittances sent abroad from foreign workers placed in Indonesia also increased. Such dynamics
sustained the secondary income account surplus at around US$ 4.5 billion in 2017, relatively unchangedon the previous period.

18

Table 10: Indonesia’s Service Account 2015-2017(million US$)ITEMS
Services- Exports- Imports
A. Manufacturing services- Exports- Imports
B. Maintenance and repair services- Exports- Imports
C. Transport- Exports- Imports
a. Passenger- Exports- Imports
b. Freight- Exports- Imports
c. Other- Exports- Imports
D. Travel- Exports- Imports
E. Construction- Exports- Imports
F. Insurance and pension services- Exports- Imports
G. Financial services- Exports- Imports
H. Charges for the use of intellectual property- Exports- Imports
I. Telecommunications, computer, and information services- Exports- Imports
J. Other business services- Exports- Imports
K. Personal, cultural, and recreational services- Exports- Imports
L. Government goods and services- Exports- Imports
Memorandum:
Number of traveler (thousands of people)- Inbound- OutboundSource: Bank Indonesia. 2018

19

2015

2016

2017

22,221-30,918
356
356
-340
284
-624
-6,146
3,456-9,602-1,215
1,293-2,508-5,204
1,406-6,610
273
758
-484
3,469
10,761-7,292
-74
379
-453
-888
54
-942
-497
248
-744
-1,60152-1,653-820
971-1,791-2,670
4,917-7,587
45
111
-67
469
632
-163

23,324-30,407
351
351
-353
411
-764
-5,544
3,572-9,116-1,0061,360-2,366-4,387
1,676-6,064
-151
536
-687
3,639
11,206-7,566
93
226
-133
-661
80
-741
-577
336
-913
-1,68647-1,732-1,175970-2,146-1,836
5,359-7,194
36
89
-53
630
678
-48

24,794-32,628
354
354
-178
169
-348
-6,864
3,472-10,336-1,105
1,552-2,656-5,582
1,283-6,865
-178
637
-815
4,242
12,531-8,289
183
369
-186
-647
83
-730
-442
640
-1,081-1,80150-1,851-1,416
1,012-2,428-1,947
5,261-7,208
74
131
-57
607
723
-115

9,794
8,345

10,8608,509

12,1999,077

Table 11: Indonesia’s Primary Income Account 2015-2017
ITEMS
Primary Income- Receipts- Payments
A. Compensation of employees- Receipts- Payments
B. Investment income- Receipts- Payments
a. Direct investment income
1) Income on equity capital- Receipts- Payments
2) Income on debt (interest)- Receipts- Paymentsb. Portfolio investment income
1) Income on equity capital- Receipts- Payments
2) Income on debt (interest)- Receipts- Payments
c. Other investment income- Receipts- Payments
Source: Bank Indonesia. 20182015
-28,379
2,822-31,201-1,361213-1,574-27,018
2,609-29,627-18,504-17,08172-17,153-1,42316-1,440-6,460-1,936283-2,219-4,525
1,812-6,337-2,053426-2,4792016-29,647
4,048-33,695-1,553219-1,772-28,094
3,829-31,923-17,593-16,557
1,101-17,658-1,03674-1,109-8,318-1,920828-2,748-6,3981,134-7,532-2,183694-2,876(million US$)2017
-32,756
6,550-39,306-1,509226-1,735-31,248
6,324-37,571-20,161-19,203
2,976-22,179
-957
14
-971
-8,837-2,457395-2,852-6,3802,157-8,537-2,250782-3,032

Table 12: Indonesia’s Secondary Income Account 2015-2017
ITEMS
Secondary Income- Receipts- Payments
A. General government- Receipts- Payments
B. Other sectors
1. Personal transfers- Receipts- Payments
2. Other current transfers- Receipts- Payments
Memorandum:- Number of Indonesian migrant worker/TKI (thousands of people)- Number of foreign migrant worker/TKA (thousands of people)
Source: Bank Indonesia. 2018

2015
5,508
10,362-4,853
149
150
-1
5,360
6,415
9,447
-3,031-1,056765-1,821

2016
4,460
9,832
-5,371
365
366
-1
4,095
5,309
8,687
-3,378-1,214778-1,992(million US$)
2017
4,498
9,990
-5,493
411
416
-5
4,087
5,316
8,785
-3,468-1,230790-2,019

3,686
86

3,511
97

3,496
96

II.1.7 Capital and Financial Account
The capital and financial account surplus increased in 2017, bolstered by the favorable investor
perception of Indonesia’s promising domestic economic outlook, coupled with milder global risks. The
capital and financial account surplus stood at US$ 29.9 billion in 2017, up from
US$ 29.3 billion in 2016 and they were underpinned by growing direct investment and portfolio
investment surpluses. Conversely, other investments recorded a larger deficit, which stifled further
capital and financial account gains.
The improvement in the capital and financial account surplus was associated with the vibrantdomestic economy, which in turn elevated investors’ perception of the national economic outlook.

20

Domestic economic indicators boosted the upbeat mood of global investors, as reflected by the Standard& Poor’s affirmation of investment grade status for Indonesia in May 2017.
Furthermore, a climate increasingly conducive to investment was also evidenced by the latest WorldBank survey on the ease of doing business, in which Indonesia climbed to 72 in 2018 from 91 in 2017.
Moreover, the successful tax amnesty, the impact of which was still being felt in the latter half of 2017,
also boosted capital and financial account performance. The influx of nonresident capital wasmaintained as a result of conducive external dynamics, while the impact of gradual monetary policy
normalization, in line with market expectations, is expected to have only a limited impact on financial
market volatility.
II.1.8 Investment
Investment is expected to continue expanding, mainly supported by building investment. Building
investment posted solid gains on the back of the government inclination to spend, especially capitalspending, which increased as of August 2017 on the same period last year. Private investment also
increased in the form of electricity and road infrastructure projects by state owned enterprises as well as
the development of affordable housing. Moreover, cement sales accelerated at the beginning of the third
quarter of 2017, indicating stronger building investment in the reporting period. Investment was also
buoyed by non-building investment. With China and India seeing unprecedented growth over the past
decade, global trade has increasingly pivoted towards Asia, putting ASEAN in a favorable position tocapitalize on new regional opportunities. Official integration of the ASEAN Economic Community(AEC) is set to have a dramatic impact on future trade growth, both within ASEAN and beyond.
Indonesia’s population and economy are the largest in the AEC, creating opportunities as regional
integration unfolds. Investment is expected to rise as foreign companies seek to access the domestic
consumer base, while export revenues could benefit from easier access to new markets.
II.1.9 Direct Investment
Non-resident capital flows in the form of direct investment hit an all-time high in 2017. Net direct
investment grew 24.9 % to US$ 20.2 billion, backed by a surge of nonresident capital inflows toIndonesia coupled with a low level of direct international investments by Indonesian residents.
The foreign direct investment (FDI) into Indonesia was drawn to acquisitions and global bondissuances through affiliate companies abroad. In 2017, FDI placements in Indonesia increased to
US$ 22.1 billion, exceeding the average for the period from 2010 to 2015. The influx of direct
investment was primarily drawn to the non-oil and gas sector, driven by acquisitions of several domestic
e-commerce firms by non-resident investors. In total, four e-commerce firms were purchased byinvestors from China, the United States, and Singapore. In addition to acquisitions, global bondissuances through offshore special purpose vehicles also spurred an upswing of FDI to Indonesia. In
contrast, direct investment in the oil and gas sector recorded a net outflow, with interest in investmentsin this sector muted.
By origin, Singapore, Europe, Japan, and China were the dominant FDI investors, with the total value
in 2017 reaching US$ 22.8 billion. Conversely, direct investment from the United States recorded a net
outflow totaling US$ 2.5 billion in 2017, a wider outflow than in 2016. By economic sector, themanufacturing, trade, fisheries, and financial sectors absorbed most FDI realization in 2017, accounting
for 82.4% of total FDI entering Indonesia. Specifically, manufacturing absorbed USD$ .6 billion, trade
US$ 4.9 billion, fisheries US$ 3.5 billion, and financial sectors US$ 1.0 billion.
On the asset side, the net direct investment outflow by Indonesian residents abroad was not
significant. The latest developments pointed to a net outflow of just US$ 1.9 billion in 2017, reversing
the net inflow recorded in 2016 and below the average outflow from 2010 to 2015 of US$ 8.5 billion.
The 2017 flows were dominated by placements in the non-oil and gas sector. The table shows
Indonesia’s Direct Investment from 2015 until 2017 as below:

21

Table 13: Indonesia’s Direct Investment 2015-2017
ITEMS
Direct Investment
A. Assets
1. Equity capital
2. Debt instruments
B. Liabilities
1. Equity capital
2. Debt instruments
a. Inflow
b. Outflow
Memorandum:
Direct investment based on directional principle
A. Direct investment abroad
1. Equity capital
2. Debt instruments
B. Direct investment in Indonesia
1. Equity capital
2. Debt instruments
Source: Bank Indonesia, 20182015
10,704-9,075-7,998-1,076
19,77918,822957
75,588-74,6312016
16,136
11,594
10,676
919
4,542
4,684
-142
50,638-50,780(million US$)2017
19,285-2,134-2,729595
21,41919,738
1,681
49,404-47,723

10,704-5,937-4,237-1,70016,641
15,0601,581

16,136
12,215
12,058
156
3,921
3,301
620

19,285-2,642-2,69856
21,927
19,7062,220

II.1.10 Portfolio Investment
Both domestic and external factors in 2017 led to a larger portfolio investment surplus than seen in 2016.
The net portfolio investment surplus stood at USD20.7 billion in 2017, up from USD19 billion in 2016,
pushed up by non-resident capital inflows to the public sector. The surplus was also prompted by anupbeat mood among economic participants concerning the promising domestic economic outlook,
together with attractive returns and milder pressures in the global financial markets.
Long-term rupiah government debt securities and global bonds were the dominant instruments
favored as nonresident portfolio investment. In 2017, all government portfolio instruments recorded asignificant net inflow. Non-resident investors booked a net buy of SUN totaling US$ 10.4 billion, up
from US$ 8.4 billion in 2016. Furthermore, non-resident holdings of government-issued global bonds
reached US$ 10.2 billion, consisting of global sukuk issuances in March, samurai bonds in June, euro
bonds in July and global bonds to prefund the 2018 fiscal budget in December. In addition, conventionaltreasury bills and Islamic treasury bills, as well as sharia-compliant government securities (SBSN)
recorded a net inflow totaling US$ 2.4 billion. Conversely, Bank Indonesia Certificates (SBI) booked a
net sell of US$ 0.1 billion in 2017.
In contrast to the surge in purchasing of government debtsecurities, private sector portfolio
investment bookeda net outflow, due to fewer non-resident placements inthe stock market. Foreign
holdings of Indonesian stockdeclined in 2017, evidenced by the US$ 2.5 billionoutflow in non-resident
investments. Non-resident investorsbegan to release stocks in the third quarter of 2017,spurred bymonetary policy normalization in the UnitedStates, coupled with the increases in the Federal FundsRate.
Nevertheless, outflow pressures were eased as thecorporate sector issued US$ 5.4 billion in global bonds
in2017, the highest level in recent years. Overall, privateportfolio investment recorded a net outflow of
US$ 1.2billion in 2017, reversing the net inflow of 2016. The table shows Indonesia’s Portfolio
Investment from 2015 until 2017 as below:

22

Table 14: Indonesia’s Portfolio Investment 2015-2017
ITEMS
Portfolio Investment
A. Assets
1. Public Sectora. Equity capitalb. Debt securities
2. Private Sectora. Equity capitalb. Debt securities
B. Liabilities
1. Public Sectora. Equity capitalb. Debt securities
1) Central bank2) Governmenta) Short termb) Long term
2. Private Sectora. Equity capitalb. Debt securities
1) Short term
2) Long term
Memorandum:
Government's debt securities, liabilities
1. Denominated in Rupiah
2. Denominated in foreign currency
Source: Bank Indonesia, 20182015
16,183-1,268392
392-1,660-758-903
17,451
17,386
17,386-135
17,521-38
17,55965-1,547
1,612-2,335
3,947(million US$)
2016
2017
18,996
20,8992,218-3,356
1,795
-9
1,795
-9
423
-3,346-210-1,560633-1,787
16,77824,255
16,83521,88016,83521,880114-105
16,72021,985-444
1,718
17,164
20,267
-57
2,375
1,319
-2,538-1,376
4,912
-291
305
-1,085
4,607

17,521
7,518
10,003

16,720
8,047
8,673

21,985
12,797
9,188

II.1.11 Other Investment
The deficit in other investment increased in 2017 to US$ 10.9 billion, nearly doubling the US$ 5.8 billion
deficit recorded in 2016. The main contributor to the larger deficit was domestic private placements inoffshore deposits on the asset side, as the impact of the tax amnesty gradually faded and private sectortransactions returned to normal. In contrast, 2016 witnessed funds returning to Indonesia during the tax
amnesty.
On the asset side, private other investment transactions recorded a deficit. In 2017, the otherinvestment deficit on the asset side stood at US$ 13.2 billion, reversing the US$ 1.8 billion surplus
posted in 2016. The reversal stemmed from an increase of placements in offshore deposits, loan
disbursements abroad, and trade credit. In anticipation of a cyclical and transient spike in demand forforeign exchange prior to IdulFitri, the banking industry increased placements in offshore deposits,
particularly in the second quarter of 2017.
On the liability side, private other investments recorded a surplus, while other investments by the
public sector experienced a deficit. Other investment transactions in the private sector recorded a
US$ 3.7 billion surplus in 2017, reversing the US$ 4.9 billion deficit of the previous year as the effectof corporate consolidation began to fade and the corporate sector resumed drawing on foreign loans. In
this way, the private sector overturned the net payment recorded in 2016. The net withdrawal of foreignloans was attributed to non-state-owned enterprises and nonbank financial institutions, while banks andstate-owned enterprises booked a net payment. Meanwhile, the other investment deficit of the public
sector on the liability side declined to US$ 1.4 billion, primarily stemming from a net payment ofgovernment foreign loans in line with government policy to reduce financing through loans.
In the public sector, the Government was less inclined to draw on foreign loans. In 2017, theGovernment withdrew US$ 3.6 billion in foreign loans, the lowest level in the past 18 years. From theforeign loans withdrawn, 55.8 % were project loans and the remainders are program loans. These loans
come from the Asian Development Bank and International Bank for Reconstruction and Development,
as well as the governments of France, Japan, China, and South Korea. The Table shows Indonesia Other

23

Investment Account from 2015 until 2017 as bellow:
Table 15: Indonesia Other Investment Account 2015-2017
ITEMS
Other Investment
A. Assets
1. Public Sector
2. Private Sector
a. Currency and deposits
b. Loansc. Trade credit and advances
d. Other assets
B. Liabilities
1. Public Sector
a. Currency and deposits
b. Loans
1) Central bank 1)a) Drawingsb) Repayments
2) Governmenta) Drawings(1) Program(2) Project(3) Otherb) Repayments
c. Other liabilities
2. Private Sector
a. Currency and deposits
b. Loans
1) Drawings
2) Repaymentsc. Trade credit and advances
d. Other liabilities
Source: Bank Indonesia, 20182015
-10,064-11,812-11,812-7,411-1,034-2,232-1,134
1,748
-190
202
-33
-33
235
5,139
3,891
1,248
-4,904
-392
1,938
768
883
30,372-29,489
401
-114

2016
-5,817
1,499
-269
1,768
2,940
-480
-725
33
-7,316-2,369
-574
-48
-48
-525
4,619
2,772
1,847
-5,145-1,795-4,947-471-5,282
20,400-25,683
998-192(million US$)2017
-10,700-13,187-13,187-7,893-2,422-1,265-1,6072,488-1,353-1,362-145-145-1,217
3,645
1,612
2,033
-4,862
9
3,840
186
1,817
23,018-21,201
1,621
216

II.1.12 Export
Cumulatively, Indonesia’s export value from January to December 2017 reaches US$ 168.73 billion or
increased by 16.22 percent compared to the same period in 2016 whereas non-oil and gas export reaches
US$ 152.99 billion or increased by 15.83 percent. The biggest non-oil and gas export in December 2017
is to China amounting US$ 2.19 billion, followed by Japan US$ 1.47 billion and the United States
US$ 1.42 billion. Their contribution reaches 38.31 percent. In the meantime, export to European Union(28 countries) reaches US$ 1.33 billion. Based on the origin province of the goods, West Java
contributes to Indonesia’s biggest export from January to December 2017 with export value US$ 29.18
billion (17.29 percent), followed by East Java US$ 18.43 billion (10.92 percent), and East Kalimantan
US$ 17.63 billion (10.45 percent).
Table 16: Export 2015-2017
ITEMS

2015
EXPORT
150.366,3- OIL AND GAS
18.574,4- NON OIL AND GAS
131.791,9
Source: Indonesia Trade Ministry, 20182016
145.186,2
13.105,5132.080,8(million US$)2017
168.828,2
15.744,3
153.083,9II.1.13 External Debt
Stronger external resilience was further confirmed by Indonesia’s external debt performance and profile.
External debt rose by 10.1% in 2017 compared with a 3.0% increase in 2016. At the end of 2017, it
stood at US$ 352.2 billion, up from US$ 320 billion at the end of 2016. Despite the increase, the ratioof external debt to GDP remained in safe territory at the end of 2017 at 34.7%, relatively stable on the24previous year’s 34.3%. This consistency is due to the external debt management efforts of the Offshore
Commercial Loan Coordinating Team, which consists of Staff from the Ministry of Finance and Bank
Indonesia.
The position of public external debt increased due to issuances of government securities (SBN).
Public external debt, accounting for 51.3% of total external debt, rose 14.1% in 2017, up from anincrease of 11% in 2016. Consequently, public external debt increased to US$ 180.6 billion in 2017from US$ 158.3 billion in 2016. This increase was used by the Government to finance development,
and most (98.7%) was long term. Furthermore, public external debt increased on all instruments,
including short-term instruments such as conventional treasury bills, Islamic treasury bills and longterm instruments, including SUN, SBSN, and government global bonds.
The position of private external debt also increased. Accounting for 48.7% of the total, the private
external debt grew 6.1% to US$ 171.6 billion in 2017 from US$ 161.7 billion in 2016. Similar to the
public sector, private external debt was dominated by long-term debt, which accounted for 72.9% of thetotal. Loan agreements continued to dominate private external debt. Based on remaining maturity, thestructure of external debt was sound, indicated by the dominance of long-term debt, which has reached84.5% of the total and is now at an all-time high. The position of long-term external debt was more
dominant than short-term debt in both the public and private sectors. The table below shows Indonesia’s
Debt Burden Indicator in from 2015 until 2017:
Table 17: External Debt 2015-2017
Debt Burden Indicators
Short Term Debt by Original Maturity to Total Debt Ratio
Short Term Debt by Remaining Maturity to Total Debt Ratio
Short Term Debt by Original to Reserve Ratio
Short Term Debt by Remaining Maturity to Reserve Ratio
Debt Service Ratio – Quarterly- DSR Tier
- DSR Tier
Debt Service Ratio - Annualized- DSR Tier
- DSR Tier
Debt to Export Ratio - Annualized
Debt to GDP Ratio
Source: Bank Indonesia, 2018

2015
12.46
17.86
36.55
52.39

2016
12.68
17.10
34.88
47.02

30.57
62.95

35.35
61.56

30.57
62.95
168.39
36.09

35.35
61.56
176.14
34.30

( %)
2017
13.91
15.54
37.63
42.06
25.16
52.42
25.16
52.42
167.73
34.68

II.1.14 Exchange Rate
The rupiah exchange rate remained generally stable in 2017 and was supported by improvement in thefundamentals of the Indonesian economy, despite some pressure from external factors in the final quarterof the year. The steady level of the exchange rate was closely linked to the positive performance of theIndonesia balance of payments, which posted a surplus on the strength of brisk foreign capital inflows
and a lower current account deficit. Capital inflows in Indonesia were stimulated not only by attractive
yields, but also improvement in the nation’s economic outlook. On the external side, movement in therupiah was affected by global dynamics throughout 2017, particularly factors driven by economic policy
and political events in the United States and Europe. In general, external factors worked in favor of therupiah exchange rate, although they did have a more adverse impact during the final quarter of 2017.
The year was marked by stable movement in the rupiah until near the end of the third quarter of 2017,
followed by depreciation through to the end of 2017. The rupiah closed 2017 at a level of IDR 13,568
to the US dollar, not markedly different from the position at the end of 2016 of IDR 13,473 to the US
dollar. Averaged over the year, the rupiah weakened fractionally by 0.6 % to IDR 13,385 to the US
dollar in 2017 from IDR 13,305 in 2016. The general stability of the rupiah was evidenced by the
declining exchange rate volatility; this fell to 3.0% in 2017 from 8.4% in 2016. The table shows middle
US$ Middle Rate against IDR (Rupiah) from 2015 until 2017 as below:

25

Table 18: USD – IDR
CURRENCY
2015
USD ($1)
13,795
Source: Bank Indonesia, 20182016
13,436(Rupiah)2017
13,548II.1.15 Inflation
Consumer price index (CPI) inflation in 2017 remained under control and within the target range of
4.0±1%. The low CPI inflation figure of 3.61% in 2017 means inflation targets have been met for threeconsecutive years. Low inflation was prevalent evenly across Indonesia. The inflation developments of2017 were reflected in monthly inflation, which was regularly recorded at a lower level than averagemonthly inflation over the last three years. Notably, in the second half, every individual month was
lower than the average monthly inflation of the last three years. Breaking this down into the individual
inflation components, controlled core inflation and low volatile food (VF) inflation contributed to these
inflation successes, but administered prices (AP) inflation rose, driven by the policy of targetedelectricity subsidies. However, the second-round effect of the electricity subsidy policy on othercommodity prices was relatively limited. The inflation achievements of 2017 were supported by Bank
Indonesia’s consistent monetary policies, as well as by policy coordination with the Government. Bank
Indonesia’s consistent monetary policy on macroeconomic stability pushed inflation expectations
downwards; they were anchored in the 4.0±1% target range. Policy coordination between Bank
Indonesia and the Government was particularly relevant in terms of supply chains. Government policy
was aimed at maintaining the availability of supplies, ensuring distribution efficiency, and stabilizing
food prices to support controlled inflation. Strengthened policy coordination between Bank Indonesia
and the Government on inflation control was achieved through Central and Regional Inflation Control
Team (TPID) forums.
Table 19: Inflation Rate from 2015 until 2017
Month
2015
January-0.24
February
-0.36
March
0.17
April
0.36
May
0.5
June
0.54
July
0.93
August0.39
September-0.05
October-0.08
November
0.21
December
0.96
3.35
Inflation Rate
Source: Indonesia Statistics, 2018

2016
0.51
-0.09
0.19
-0.45
0.24
0.66
0.69
-0.02
0.22
0.14
0.47
0.42
3.02

(%)
2017
0.97
0.23
-0.02
0.09
0.39
0.69
0.22
-0.07
0.13
0.01
0.20
0.71
3.61

II.1.16 Financial System
Macro prudential policy in 2017 was aimed at supporting the intermediation function of banks bycontinuing touphold financial system stability. By safeguarding thisstability, Bank Indonesia gives itself
room to continuepursuing its accommodative macro prudential policy.An accommodative macro
prudential stance will reversethe downward direction of the financial cycle andsupport the ongoing
economic recovery process. In2017, Bank Indonesia continued its accommodativepolicy stance towards
the loan-to-value (LTV), financing-to-value (FTV) and loan-to-funding ratios (LFR), as it hasdone since2015. Efforts to support improvements in thefinancial cycle were also strengthened bysafeguardingbanks’ capacity to provide loans by reaffirming thecountercyclical capital buffer (CCB) at
0%. In addition,Bank Indonesia has also continued to encourage loangrowth for the development of
micro, small, and mediumenterprises (MSME), both from the side of loans supplyby raising theminimum limit of the lending ratio forMSME, and from the angle of loan demand by raisingthe capacityof MSME players. From the perspective offinancial system stability risk management, Bank

26

Indonesiaconsistently undertakes macro prudential surveillance andsupervision and has establishedcloser coordination withrelated authorities, particularly around preventing andhandling a financial
system crisis. The table shows Indonesia’s Banking Operation from 2015 until 2017 as below:
Table 20: Indonesia’s Banking Operation 2015-2017
Indicator
2015
Distribution of Funds
Commercial Banks
5,952,279
Rural Banks
98,60453,567
SBI and SBIS 1)
Source of Funds
Commercial Banks
4,909,707
Rural Banks
84,728
Total Assets
Commercial Banks
6,095,908
Rural Banks
101,7131)Sharia based Bank Indonesia Securities
Source: Bank Indonesia, 2018

2016

Indicator
2015
Total Banks
Commercial Banks
118
Rural Banks
1,636
Total Bank Offices
Commercial Banks
32,949Rural Banks
5,9821)Sharia based Bank Indonesia Securities
Source: Bank Indonesia, 2018

2016

(Billion rupiah)
2017

6,570,903
109,389
96,103

7,177,051
121,296
19,901

5,399,210
93,622

5,921,000
103,874

6,729,799
113,501

7,387,144
125,945

2017
116
1,633

115
1,619

32,7306,075

32,285
6,192

Bank Indonesia has coordinated with other authorities to strengthen the effectiveness of macro
prudential policy in maintaining financial system stability. The coordination on subjects including
macro-micro prudential policy and MSME (Micro, Small and Medium Enterprises) development was
conducted either bilaterally or in one coordinating pool and was done through the Financial System
Stability Committee (KSSK).
To maintain financial system stability, Bank Indonesia worked together with other institutions, mostnotably the Ministry of Finance, the Financial Services Authority (OJK), and the Deposits Insurance
Agency (LPS). Coordination between these four institutions takes place through the Financial System
Stability Committee (KSSK) forum, as mandated in the Law concerning the Prevention and Handlingof Financial System Crises (PPKSK). The role of KSSK is to: coordinate the monitoring andmaintenance of financial system stability, handle financial system crises and handle systemic bankproblems, when the banking system is both normal or in crisis. The members of KSSK are the Bank
Indonesia Governor, the Minister of Finance, OJK’s Chairman of the Board of Commissioners and
LPS’s Chairman of the Board of Commissioners. The table shows Indonesia’s Common Banking
Performance from 2015 until 2017:27

Table 21: Indonesia’s Common Banking Performance 2015-2017(Billion Rupiah)
Items

2015

Capital Adequacy Ratio (%)- Capital- Risk Weighted Assets
Core Capital Ratio to ATMR (%)- Core Capital (Tier I)- Risk Weighted Assets
Return On Assets Ratio (%)- Profit- Average total assets
Operating Expenses/Operating Income (%)- Operating Expenses- Operating Income
Net Interest Margin Ratio (%)- Interest income net- Average total earning assets
Loan to Deposits Ratio (%)- Total Credit to third party- Total Third Party Funds
Liquid Assets Ratio (%)- Primary Liquid Asset- Secondary Liquid assets- Total Assets
Source: Bank Indonesia, 2018

21.39
914,657
4,276,555
19.00
812,590
4,276,555
2.32
132,601
5,703,813
81.49
569,141
698,404
5.39
293,824
5,449,642
92.11
3,903,936
4,238,349
16.70
736,720
251,623
5,919,390

2016
22.93
1,052,597
4,589,611
21.19
972,350
4,589,611
2.23
136,048
6,106,959
82.22
624,173
759,146
5.63
329,9135,854,786
90.70
4,199,713
4,630,352
17.50
837,433
296,098
6,475,602

2017
23.18
1,166,002
5,029,816
21.50
1,081,234
5,029,816
2.45
165,196
6,730,350
78.64
603,178
766,975
5.32
342,7316,445,076
90.04
4,548,155
5,050,984
18.56
963,833
353,504
7,099,564

II.2 Domestic Environment
II.2.1 Economic Overview as of December 2017
On the one hand it is positive that Indonesia's GDP growth is continuing to accelerate. In fact, the 5.07
percent growth figure is the nation's fastest full-year GDP growth figure since 2013. Moreover, the 5.19
percent (y/y) growth figure in Q4-2017 is the best Q4 GDP growth figure since 2013. Also positive isthat Indonesia's nominal GDP reached IDR 13,558 trillion, or US$ 1 trillion using the 2017 exchange
rate. This puts Indonesia in the US$ 1 trillion economy group of nations.
Household consumption is an important component to watch because it accounts for about 56
percent of Indonesia's economic growth. Meanwhile, investment growth picked up in Q4-2017. Grossdomestic fixed capital formation grew by 7.27 percent (y/y) in the last quarter of 2017. Amid bleak
household consumption Indonesian President JokoWidodo has high hopes for investment realization.
Therefore, the government has been opening several sectors to foreign direct investment in recent years
and has been eager to improve the nation's investment climate (for example through deregulation).
Another positive development is that Indonesia's export performance has improved on the back of risingcommodity prices and improving global demand.
II.2.2 Economic Growth
Indonesia’s economy continued to recover in 2017, with momentum garnered from supportive global
dynamics and maintained macroeconomic stability at home. Solid global economic growth in advanced
economies and developing economies, including major trade partners of Indonesia, combined withrising commodity prices, boosted Indonesia’s export performance, particularly exports of commodities.
These export gains and government spending on infrastructure has restored corporate confidence ininvesting. Consequently, corporate sector consolidation began to tail off, replaced by stronger corporate
investment in the second half of the year. Investment gains and an increase in exports helped to drive
Indonesia’s economic growth to 5.07% in 2017 from 5.03% in 2016, but these improvements have notyet significantly lifted household consumption.
The ongoing economic recovery has benefitted public welfare and prosperity. Unemployment,28

poverty and inequality all declined in 2017, although the number of informal workers remained high.
Low inflation and stable prices for staple foods, as well as a slight increase in incomes, helped toalleviate poverty. Furthermore, indicators in 2017 demonstrated a moderate decrease in inequality, as
spending by the top 20% of the population fell.
II.2.3 GDP – By Expenditure
Export and investment gains drove the gradual domestic economic recovery in 2017. Economic growth
dynamics show Indonesia has recovered from its lowest growth level – 4.74% –recorded in the second
quarter of 2015. Since then, the national economy has steadily improved, with GDP growth recorded at
5.07% in 2017, up from 5.03% in 2016. This recovery is based on stronger export and investment growthin 2017, in line with a favorable global economic climate and steady economic fundamentals. Bothexports and investment made a greater contribution to economic growth in 2017 versus 2016. The tableshows GDP Growth by expenditure in Indonesia from 2015 until 2017 as below:
Table 22: GDP Growth by Expenditure in Indonesia 2015-2017
Component of GDP

2015
4.94
4.84
4.96
-0.62
5.31
5.01
6.11
1.93
-0.59
0.94
-2.12
-6.25
4.88

Domestic Demand
Private Consumption
Household Consumption
Non-Profit Institution Serving Household Consumption
Government Expenditure
Gross Fixed Capital Formation
Building
Non-Building
Change of Inventory
Net Export
ExportImportGross Domestic ProductSource: Indonesia Statistic, 2018

percent, yoy
2016 2017
4.39
5.13
5.04
4.98
5.01
4.95
6.64
6.91
-0.14
2.14
4.47
6.15
5.18
6.24
2.43
5.9
0.23 -0.19
0.16
0.35
-1.57
9.09
-2.45
8.06
5.03
5.07

Indonesia experienced domestic economic improvement in the second half of 2017. This was driven
by an increasingly solid global economic recovery and resulted in a significant 9.09% increase in exports
for 2017, the highest level posted in five years and a sharp contrast to the 1.57% contraction in 2016.
Consolidation in the corporate sector lessened and the Government ramped up several infrastructure
projects, which boosted investment primarily in the second half of the year. Gross fixed capitalformation growth stood at 6.15%, easily surpassing the 4.47% posted in 2016. However, this improving
export and investment performance has thus far failed to significantly stimulate private consumption,
particularly household consumption.
II.2.4 GDP – By Industrial Origin
Indonesia’s main economic drivers in 2017 were the agricultural, forestry, and fisheries sector, plus
certain mining and quarrying subsectors. Coal was a key driver, and exports rose. The government
decision to speed up infrastructure projects strengthened the construction sector, while a shift inhousehold spending boosted the accommodation, food and beverages, transportation and warehousing,as well as information and communications sectors. In contrast, financial services, corporate services,and other services experienced slower growth. The Table shows GDP Growth in Indonesia by Industrial
Origin from 2015 until 201729

Table 23: GDP Growth in Indonesia by Industrial Origin 2015-2017
Component of GDP
Agriculture, Forestry and Fishery
Mining and Quarrying
Manufacturing
Electricity
Water Supply, Garbage, Waste Management and Remediation Activities
Construction
Wholesale and Retail Trade, Repair of Car and Motorcycle
Accommodation, Food and Beverage Supply
Transportation and Storage
Information and Communication
Financial Service
Real EstateBusiness Service
Government, Administration, Defense and Compulsory Social Security
Education Service
Health Service and Other Activities
Other Activities
Taxes Less Subsidies on Product
Gross Domestic ProductSource: Indonesia Statistics, 2018

2015
3.75
-3.42
4.33
0.9
7.07
6.36
2.54
6.71
4.31
9.7
8.58
4.11
7.69
4.63
7.33
6.69
8.08
32.55
4.88

percent, yoy
2016 2017
3.36
3.81
0.95
0.69
4.26
4.27
5.39
1.54
3.6
4.61
5.22
6.79
4.03
4.44
7.45
8.49
5.17
5.55
8.88
9.81
8.9
5.48
4.69
3.68
7.36
8.44
3.19
2.06
3.8
3.66
5.15
6.79
8.02
8.66
19.2 13.38
5.03
5.07

Strong production from plantations and fisheries lifted the agriculture, forestry, and fisheries sector
and accounted for half the sector’s growth. The plantation subsector grew 4.46% in 2017, up from 3.47%
in the previous year, while the fisheries sector expanded by 5.95% from 5.15%. This increase in bothplantation and fisheries production is attributed to favorable weather conditions in 2017, after severe
disruptions in 2016 caused by La Niña, and a larger fishing fleet. Furthermore, incidences of land
clearance fires were minimized in 2017 by more stringent supervision. Land expansion for plantations
was also restricted by an extension to the moratorium on new licenses for palm oil on virgin forest andpeat land. Rising exports and prices for plantation commodities, particularly CPO, buoyed producers offresh fruit bunches of oil palm.
II.2.5 Domestic Demand
Stronger domestic demand combined with a growing need to boost exports fed into import dynamics invarious regions. Robust import growth was observed in the regions of Sumatra, Java, Sulawesi, andPapua. A need for transportation equipment to support plantation and mining operations outside Java
prompted imports of capital goods. Furthermore, several natural resources companies in Sumatra and
Sulawesi enhanced their CPO processing capacity and increased their fishing catch. Also in Sulawesi,
some manufacturing imports rose, particularly wheat for processing into flour. Imports also increased
into Papua; this primarily affected iron and steel for infrastructure projects. Meanwhile, the constructionof electricity projects in Sumatra, Kalimantan, and West Nusa Tenggara triggered imports of machineryand equipment. On Java, imports of capital goods picked up, particularly in the second half, relating toinvestments in transport and textiles, as well as downstream industries.
II.2.6 Growth of Household Consumption
Household consumption across Indonesia’s regions was also inextricably linked to the production ofcommodities. Solid increases in household consumption were recorded in the producing areas ofKalimantan and Sulawesi as CPO, coal, and other mining commodity prices soared Growth in household
consumption was not, however, balanced across all regions rich in natural resources, because job
creation was limited. For example, corporations continued to utilize rising export proceeds to maintainequipment. Furthermore, total workers employed in the primary sector declined as the expansion ofagricultural land slowed, which impeded job creation. Household consumption growth was also
somewhat muted on Java, Indonesia’s dominant region, due to a smaller increase in the minimum
provincial wage (UMP) than had been seen in previous years, following changes to the way it iscalculated. The impact of the annual increase in the UMP was also limited on Sumatra, a region30

dominated by industry. The UMP was raised by 8.25% in 2017 but down from more than 10% in 2016.14
In addition, a decline in remittances from Eastern Indonesia also impacted incomes and consumption inseveral regions, particularly Java.
II.2.7 Government Consumption
Policies introduced in 2015 and 2016 to enhance expenditure quality and accelerate regional transfers –transfers of money from central to local or provincial governments – and disbursements under the
Village Fund – central government money for welfare and village development – were intended to foster
regional economic growth. In addition to capital spending for investment purposes, government
consumption was another form of regional fiscal stimulus. In 2017, the Government managed to increase
its own consumption in all regions, except Kalimantan. Central Government measures to improve the
disbursement system for regional transfers and village funds through State Treasury Services Offices(KPPN) helped to accelerate regional government spending. The significant larger allocation of village
funds is in 2017, increasing from IDR47 trillion in 2016 to IDR60 trillion, also nurtured regional
economic activities. Regional transfers and village fund realization reached IDR742 trillion in 2017, up
4.5% on 2016. Furthermore, the absorption of government spending increased to 91% in 2017 from
85.5% in 2016.
II.2.8 Employment, Welfare, Poverty and Inequality
The manufacturing industry also contributed to a sound employment market, particularly on Java.
Labor-intensive industries, such as electronics and food and beverages, added new jobs, and more labor
was absorbed by manufacturing in West Java and Banten. Outside of Java, more labor was absorbed in2017 by the development of industrial zones, including the Morowali Industrial Park in Central Sulawesi,
Bantaeng Industrial Park in South Sulawesi, Konawe Industrial Park in Southeast Sulawesi, andMandalika Special Industrial Zone in West Nusa Tenggara. As part of the Government’s strategic
program, these industrial zones developed outside Java were not only complemented with physicalinfrastructure networks, but also with vocational education centers to support the absorption of newlyskilled local labor.
Table 24: The unemployment rate in by province 2015-2017:
Province
Aceh
Sumatera Utara
Sumatera Barat
Riau
Jambi
Sumatera Selatan
Bengkulu
Lampung
Kepulauan Bangka Belitung
Kepulauan Riau
DKI Jakarta
Jawa Barat
Jawa Tengah
DI Yogyakarta
Jawa Timur
BantenBali
Nusa Tenggara Barat
Nusa Tengggara Timur
Kalimantan Barat
Kalimantan Tengah
Kalimantan Selatan
Kalimantan Timur
Kalimantan Utara
Sulawesi Utara

2015
February
August
7.73
9.93
6.39
6.71
5.99
6.89
6.72
7.83
2.73
4.34
5.03
6.07
3.21
4.91
3.44
5.14
3.35
6.29
9.05
6.20
8.36
7.23
8.40
8.72
5.31
4.99
4.07
4.07
4.31
4.47
8.58
9.55
1.37
1.99
4.98
5.69
3.12
3.83
4.78
5.15
3.14
4.54
4.83
4.92
7.17
7.50
5.79
5.68
8.69
9.03

2016
February
August
8.13
7.57
6.49
5.84
5.81
5.09
5.94
7.43
4.66
4.00
3.94
4.31
3.84
3.30
4.54
4.62
6.17
2.60
9.03
7.69
5.77
6.12
8.57
8.89
4.20
4.63
2.81
2.72
4.14
4.21
7.95
8.92
2.12
1.89
3.66
3.94
3.59
3.25
4.58
4.23
3.67
4.82
3.63
5.45
8.86
7.95
3.92
5.23
7.82
6.18

31

(%)
2017
February
August
7.39
6.57
6.41
5.60
5.80
5.58
5.76
6.22
3.67
3.87
3.80
4.39
2.81
3.74
4.43
4.33
4.46
3.78
6.44
7.16
5.36
7.14
8.49
8.22
4.15
4.57
2.84
3.02
4.10
4.00
7.75
9.28
1.28
1.48
3.86
3.32
3.21
3.27
4.22
4.36
3.13
4.23
3.53
4.77
8.55
6.91
5.17
5.54
6.12
7.18

Sulawesi Tengah
Sulawesi Selatan
Sulawesi Tenggara
Gorontalo
Sulawesi Barat
MalukuMaluku Utara
Papua Barat
Papua
Indonesia
Source: Indonesia Statistic, 2018

2.99
5.81
3.62
3.06
1.81
6.72
5.56
4.61
3.72
5.81

4.10
5.95
5.55
4.65
3.35
9.93
6.05
8.08
3.99
6.18

3.46
5.11
3.78
3.88
2.72
6.98
3.43
5.73
2.97
5.50

3.29
4.80
2.72
2.76
3.33
7.05
4.01
7.46
3.35
5.61

2.97
4.77
3.14
3.65
2.98
7.77
4.82
7.52
3.96
5.33

3.81
5.61
3.30
4.28
3.21
9.29
5.33
6.49
3.62
5.50

Table 25: The average of wages/salary by Education Attainment in 2017
Educational Attainment
No Schooling
Not/Not Yet Completed Primary School
Elementary School
Junior High School
High School (General)
High School (Vocational)
Diploma I/II/III/Academy
University
Average
Source: Indonesia Statistic, 2018

February 2017
1,196,831
1,396,636
1,633,614
1,847,374
2,537,845
2,613,633
3,432,911
4,551,988
2,702,590

RupiahAugust 2017
1,274,562
1,434,207
1,666,573
1,918,092
2,666,627
2,678,607
3,543,796
4,515,054
2,742,621

Table 26: The Percentage of People Living in Poverty by Province in 2015-2017
Province
ACEH
SUMATERA UTARASUMATERA BARAT
RIAU
JAMBI
SUMATERA SELATANBENGKULULAMPUNG
KEP. BANGKA BELITUNG
KEP. RIAU
DKI JAKARTAJAWA BARATJAWA TENGAH
DI YOGYAKARTAJAWA TIMUR
BANTENBALINUSA TENGGARA BARATNUSA TENGGARA TIMUR
KALIMANTAN BARATKALIMANTAN TENGAH
KALIMANTAN SELATANKALIMANTAN TIMUR
KALIMANTAN UTARASULAWESI UTARASULAWESI TENGAH
SULAWESI SELATANSULAWESI TENGGARAGORONTALOSULAWESI BARATMALUKUMALUKU UTARAPAPUA BARATPAPUAINDONESIA
Source: Indonesia Statistics, 20182015
Semester 1
Semester 2
17.08
17.11
10.53
10.79
7.31
6.71
8.42
8.82
8.86
9.12
14.25
13.77
17.88
17.16
14.35
13.53
5.4
4.83
6.24
5.78
3.93
3.61
9.53
9.57
13.58
13.32
14.91
13.16
12.34
12.28
5.9
5.75
4.74
5.25
17.1
16.54
22.61
22.58
8.03
8.44
5.94
5.91
4.99
4.72
6.23
6.1
6.24
6.32
8.65
8.98
14.66
14.07
9.39
10.12
12.9
13.74
18.32
18.16
12.4
11.9
19.51
19.36
6.84
6.22
25.82
25.73
28.17
28.4
11.22
11.13

32

2016
Semester 1
Semester 2
16.73
16.43
10.35
10.27
7.09
7.14
7.98
7.67
8.41
8.37
13.54
13.39
17.32
17.03
14.29
13.86
5.22
5.04
5.98
5.84
3.75
3.75
8.95
8.77
13.27
13.19
13.34
13.1
12.05
11.85
5.42
5.36
4.25
4.15
16.48
16.02
22.19
22.01
7.87
8
5.66
5.36
4.85
4.52
6.11
6
6.23
6.99
8.34
8.2
14.45
14.09
9.4
9.24
12.88
12.77
17.72
17.63
11.74
11.19
19.18
19.26
6.33
6.41
25.43
24.88
28.54
28.4
10.86
10.7

(%)
2017
Semester 1
Semester 2
16.89
15.92
10.22
9.28
6.87
6.75
7.78
7.41
8.19
7.9
13.19
13.1
16.45
15.59
13.69
13.04
5.2
5.3
6.06
6.13
3.77
3.78
8.71
7.83
13.01
12.23
13.02
12.36
11.77
11.2
5.45
5.59
4.25
4.14
16.07
15.05
21.85
21.38
7.88
7.86
5.37
5.26
4.73
4.7
6.19
6.08
7.22
6.96
8.1
7.9
14.14
14.22
9.38
9.48
12.81
11.97
17.65
17.14
11.3
11.18
18.45
18.29
6.35
6.44
25.1
23.12
27.62
27.76
10.64
10.12

Table 27:Gini Ratio by Province 2015-2017
Province
ACEH
SUMATERA UTARASUMATERA BARAT
RIAU
JAMBI
SUMATERA SELATANBENGKULULAMPUNG
KEP. BANGKA BELITUNG
KEP. RIAU
DKI JAKARTAJAWA BARATJAWA TENGAH
DI YOGYAKARTAJAWA TIMUR
BANTENBALINUSA TENGGARA BARATNUSA TENGGARA TIMUR
KALIMANTAN BARATKALIMANTAN TENGAH
KALIMANTAN SELATANKALIMANTAN TIMUR
KALIMANTAN UTARASULAWESI UTARASULAWESI TENGAH
SULAWESI SELATANSULAWESI TENGGARAGORONTALOSULAWESI BARATMALUKUMALUKU UTARAPAPUA BARATPAPUAINDONESIA
Source: Indonesia Statistic, 20182015
Semester 1
Semester 2
0.334
0.339
0.336
0.326
0.342
0.319
0.364
0.366
0.361
0.344
0.36
0.334
0.376
0.371
0.376
0.352
0.283
0.275
0.364
0.339
0.431
0.421
0.415
0.426
0.382
0.382
0.433
0.42
0.415
0.403
0.401
0.386
0.377
0.399
0.368
0.36
0.339
0.348
0.334
0.33
0.326
0.3
0.353
0.334
0.316
0.315
0.294
0.314
0.368
0.366
0.374
0.37
0.424
0.404
0.399
0.381
0.42
0.401
0.363
0.362
0.34
0.338
0.28
0.286
0.44
0.428
0.421
0.392
0.408
0.402

2016
Semester 1
Semester 2
0.333
0.341
0.319
0.312
0.331
0.312
0.347
0.347
0.349
0.346
0.348
0.362
0.357
0.354
0.364
0.358
0.275
0.288
0.354
0.352
0.411
0.397
0.413
0.402
0.366
0.357
0.42
0.425
0.402
0.402
0.394
0.392
0.366
0.374
0.359
0.365
0.336
0.362
0.341
0.331
0.33
0.347
0.332
0.351
0.315
0.328
0.3
0.305
0.386
0.379
0.362
0.347
0.426
0.4
0.402
0.388
0.419
0.41
0.364
0.371
0.348
0.344
0.286
0.309
0.373
0.401
0.39
0.399
0.397
0.394

%
2017
Semester 1
Semester 2
0.329
0.329
0.315
0.335
0.318
0.312
0.325
0.325
0.335
0.334
0.361
0.365
0.351
0.349
0.334
0.333
0.282
0.276
0.334
0.359
0.413
0.409
0.403
0.393
0.365
0.365
0.432
0.44
0.396
0.415
0.382
0.379
0.384
0.379
0.371
0.378
0.359
0.359
0.327
0.329
0.343
0.327
0.347
0.347
0.33
0.333
0.308
0.313
0.396
0.394
0.355
0.345
0.407
0.429
0.394
0.404
0.43
0.405
0.354
0.339
0.343
0.321
0.317
0.33
0.39
0.387
0.397
0.398
0.393
0.391

Infrastructure development also created local job opportunities in areas with large-scale projects,
such as Java. Nevertheless, increasing mechanization, particularly on urban public transportation
projects, limited the number of job openings for construction workers. Innovative government policies
to stimulate regional economies through greater connectivity also played an important role innurturingemployment. Approval for a new direct international flight to North Sulawesi catalyzed
tourism development in the province and beyond, which created new jobs and offset rising local
unemployment.
Conversely, labor absorption in the mineral and oil and gas mining subsectors declined in 2017, andlayoffs made by mining corporations in Papua had a deleterious effect on rising open unemployment in
the region. Corporate rationalization was necessary to adjust to new mining license policies, which
stoked uncertainty regarding investment and production.
The economic recovery also lifted welfare. The poverty rate edged down to 10.1% in 2017, from
10.7% in 2016. This can be attributed to low and stable inflation, especially food inflation, which has
reduced poverty line inflation sharply over the past few years. The number of urban poor people remains
well below that of rural poor, but several challenges specific to the urban poor persist. Notably, census
data from 2015 points to accelerating urbanization – driven by limited job availability and stagnant
income growth in rural areas – but urban job creation is growing at a slow pace.
Reduced economic inequality is indicative of improving welfare conditions. The Gini ratio stood at33

0.391 in September 2017, down slightly from 0.394 in September 2016. Nevertheless, the apparent
improvement was due to reduced spending by the uppermost 20% percentile. By location, the lower
Gini ratio stemmed from urban areas, contrasting the moderate increase recorded in rural areas
II.3. Fiscal Situation
Fiscal policy in 2017 aimed to speed up economic recovery in order to achieve sustainable and equitableeconomic growth. The 2017 State Budget (APBN) balanced stimulus needs over the short and long term,
while also maintaining fiscal resilience. On the income side, the Government continued to widen the
taxpayer database and increase tax compliance, which contributed to higher tax revenues in 2017 versus
2016. The increase in 2017 income was also supported by rising commodity prices, including for oil
and gas. However, the tax-to-GDP ratio fell, highlighting the ongoing challenges Indonesia faces ingenerating income, particularly tax revenues. On the expenditure side, the Government made efforts toimprove the quality of spending and to balance short- and long term stimulus. In this context, spending
on non-priority goods was reduced and on energy subsidies flattened, while spending on social
assistance and infrastructure increased. The Government was able to keep the 2017 fiscal deficit at ahealthy level of 2.5% of GDP and the government debt ratio at a safe 29.2%.
Fiscal Policy in 2017 had some objectives namely: Stimulus, Endurance and Sustainability. Fromstimulus side, Fiscal policy provided fiscal incentive for strategic economy activity, spending for
improving the quality of infrastructures, and debt for productive activities. On the other hands,
Endurance in fiscal policy aimed for fiscal buffer, flexibility and fiscal vulnerability. To achievesustainability, Fiscal policy had be able to control primary balance, control debt ratio and control budget
deficit.
The direction of regional fiscal policy in 2017 was consistent with central policy; the goal was toaccelerate economic recovery. Policy strategy was pursued by reducing the dependence of regional
funding on central sources of funding and by channeling expenditure toward productive sectors such as
infrastructure development. The Government boosted the role of the regions in stimulating the economy
by increasing funding transfers to the regions and village funds (TKDD); this funding was used
optimally, including that portion spent on infrastructure development.
Both global and domestic economic developments affected policy formulation and the fiscal
realization of the central government in 2017. The APBN was set in November 2016 and assumed higher
economic growth in 2017 of 5.3%, up from 5.0% realized growth in 2016. In turn, the assumption ofhigher economic growth influenced the inflation assumption; inflation was expected to increase to 4.7%.
However, economic dynamics prompted changes to these macroeconomic assumptions, and theGovernment’s financial achievements up to mid-2017 were not as expected. Consequently, it issued the2017 Revised State Budget.
The fiscal policy strategy of accelerating economic growth is seen in the original 2017 State Budget.
Domestic income was targeted at IDR 1,750.3 trillion, up 12.5% on the realized 2016 figure. State
spending was set at IDR 2,080.5 trillion, up 11% versus the actual 2016 figure. These estimates gave
rise to a 2017 budget deficit of approximately 2.5% of GDP, in line with the 2016 figure. The 2017 State
Budget was to be funded in part through a net issuance of state securities (SBN) at IDR 400 trillion,
slightly lower than the IDR407.3 trillion realized in 2016.
As 2017 unfolded, the fiscal management strategy resulted in better budget performance. Revenues
and expenditure grew and the fiscal deficit remained below 3% of GDP. Revenues in 2017 grew by
7.0%, up from 3.2% growth in 2016, mainly lifted by contributions from oil, gas and natural resources,
but non-oil and gas revenues – especially income tax – were below target. Spending in 2017 grew by
7.4%, up from 3.2% growth in 2016, while the absorption rate of spending set out in the 2017 RevisedState Budget increased to 93.9% in 2017 from 89.5% in 2016. Acceleration in both government
consumption spending and government investment began in the third quarter of 2017 following therevisions, which were approved in July 2017. Higher government consumption spending was supported

34

by social assistance payments, which rose 11.5% in 2017 versus 2016, while infrastructure spendingrose 44.3%. Overall, the 2017 fiscal deficit was maintained at a safe 2.5% of GDP, with a government
debt ratio at a healthy 29.2% of GDP.
II.3.1 State Revenue
State income rose in 2017, driven by increased growth of both tax and non-tax revenues. Domestic
income was recorded at IDR 1,655.5 trillion, up 7.0% from 2016 – and higher than the 3.2% growthrecorded in 2016 – lifted by increases in the prices of oil, gas and other commodities. A strong domestic
economic recovery in the second half of 2017 also supported tax revenues, especially VAT. Revenues
were also boosted by the tax amnesty program, which widened the tax database and the tax complianceof taxpayers, both bodies and individuals.The Table shows budgeted and actual Indonesia’s State
Revenue from 2015 until 2017 as below:
Table 28: State Revenue 2015-2017
ITEMS
BudgetGovernment Revenues and Grants
Domestic Revenues
Tax Revenues
Domestic Taxes
Income Tax
i. Non-Oil and Gas
ii.Oil and Gas
Value Added Tax
Land and Building Tax
Duties on Land and Building Transfers
Exercise Duties
Others Domestic Taxes
International Trade Taxes
ImportExportNon Taxes Revenues
Natural Resources
Oil Revenues
Gas Revenues
Other Natural Resources
Profit Transfers From SOE's
Bank Indonesia Surplus
Revenue from Public Service Institution
Other Non-Tax Revenues
GrantsActualGovernment Revenues and Grants
Domestic Revenues
Tax Revenues
Domestic Taxes
Income Tax
i. Non-Oil and Gas
ii. Oil and Gas
Value Added Tax
Land and Building Tax
Duties on Land and Building Transfers
Exercise Duties
Others Domestic Taxes
International Trade Taxes
ImportExportNon Taxes Revenues
Natural Resources
Oil Revenues
Gas Revenues
Other Natural Resources(billion Rupiah)
2017

2015

2016

1,761,643
1,758,331
1,489,255
1,439,999
679,370
629,835
49,535
576,469
26,6900145,740
11,72949,257
37,204
12,053
269,075
118,919
61,584
19,781
37,55436,957
0
23,09090,1103,312

1,786,225
1,784,250
1,539,166
1,503,295
855,843
819,497
36,346474,235
17,7110
148,091
7,415
35,87233,3722,500
245,084
90,524
51,32817,36021,83634,164036,271
84,124
1,975

1,736,060
1,732,952
1,472,710
1,436,731
783,970
742,200
41,770475,483
15,4120
153,165
8,700
35,97933,2792,700
260,242
95,64357,407
14,801
23,43541,000038,54185,0583,108

1,508,020
1,496,047
1,240,419
1,205,479
602,308
552,637
49,672423,71129,2500144,641
5,568
34,94031,213
3,727
255,628
100,972
47,98730,18322,801

1,555,934
1,546,946
1,284,970
1,249,499
666,212630,11436,099412,213
19,443
0
143,525
8,105
35,471
32,472
2,999
261,976
64,902
31,44812,64620,808

1,666,376
1,654,746
1,343,530
1,304,316
646,793
596,478
50,316
480,725
16,7701
153,288
6,738
39,21435,066
4,147
311,216
111,132
58,20323,64029,28935

Profit Transfers From SOE's
Bank Indonesia Surplus
Revenue from Public Service Institution
Other Non-Tax Revenues
Grants
Source: Ministry Of Finance, 2018

37,644035,315
81,697
11,97337,133
041,946
117,995
8,988

43,904047,345
108,835
11,630The increase in revenues from oil and gas income tax, VAT, excise tax and international trade tax
minimized the impact of the weaker performance of other tax components, including the land andproperty tax and nonoil and gas income tax. The lower growth in revenues from the property tax reflects
the impact of a tariff reduction policy to ease the issuance of real estate investment funds and changes
in the regulations governing the use of forest lands. The decline in the performance of non-oil and gas
income tax in 2017 was owed more to the base effect of Indonesia’s tax amnesty program, which began
in July 2016 and brought in IDR 135 trillion in total. In 2016, the high non-oil and gas income tax
receipts were supported by relatively high income of IDR114 trillion from phases I and II of the tax
amnesty program. Phase III took place over the first quarter of 2017 and brought in IDR21 trillion. If
receipts from the tax amnesty program are stripped from non-oil and gas income tax receipts for 2016
and 2017, non-oil and gas income tax receipts grew faster in 2017 than 2016.
Amid higher state revenues in 2017, the challenge to increase tax revenues remained at the fore,
given the decline in the tax-to-GDP ratio to 9.9% in 2017 from 10.4% in 2016. This issue warrants
greater attention, because it threatens Indonesia’s fiscal sustainability. The Table shows budgeted andactual Indonesia’s State Revenue from 2015 until 2017 as below:
II.3.2 State Expenditure
Various fiscal spending strategies have been pursued to accelerate economic recovery. The quality ofspending was improved, while the balance between short-term and long-term fiscal stimulus wasmaintained. Both central government spending and transfers to TKDD (Transfer To Region and VillageFund) have been improved, with energy subsidies better targeted and efficiencies made in spending on
goods, thereby providing space for increased spending on social protection, education, health andinfrastructure.
As a consequence, government spending in 2017 reached IDR 2,002.8 trillion, up 7.4% compared
to 2016. This increase was also accompanied by better absorption of spending in 2017 compared to 2016
meaning that the realization of state spending in relation to the 2017 Revised State Budget target wasalso higher. This condition was reflected in higher central government spending, which grew by 9.2%
and higher transfers to TKDD, which grew 4.5% in 2017.
The stimulus to support sustainable long-term economic growth was achieved through a productive
capital expenditure policy and by increasing local involvement in infrastructure development. For
central government spending, actual capital expenditure rose by 21.1%, as the continuing fiscal reforms
shifted spending from energy subsidies to infrastructure.
The role of the regions in supporting fiscal stimulus was also encouraging, though further
improvement is needed. Actual transfers to TKDD in 2017 came to IDR742 trillion, although growthslowed to 4.5% versus 14% in 2016. The slowing TKDD growth owed, at least in part, to a delay in thetransfer of DBH (Profit Sharing Fund) funds and slower growth in physical DAK (Special Allocation
Fund) for spending on facilities and physical infrastructure. This latter point is related to a new
regulation requiring local governments to submit a proposal first. Meanwhile, 2017 non-physical DAK– used for operational purposes – grew by a brisk 19% and village funds by 28%, in line with the increasein the social protection budget, which is partly channeled through the regions, and the intention toempower and strengthen the villages. The table shows Indonesia’s Expenditure Budget from 2015 until
2017 as below:

36

Table 29: Expenditure Budget 2015-2017
ITEMS
BudgetGovernment Expenditures
Central Government Expenditures
Current Expenditures
Personnel
Goods and Services
CapitalInterest payment
Domestic Interest
External Interest
Additional Interest
Subsidies
Oil Subsidies
Non-Oil Subsidies
Grant Expenditures
Social Assistance
Others Current Expenditures/Others Expenditures
Development Expenditures
Rupiah Financing
Project aid
Regional Budget Expenditures
Balance Budget
Revenue Sharing Funds
General Allocation Funds
Special Allocation Funds
Special Autonomy
Rural Fund
ActualGovernment Expenditures
Central Government Expenditures
Current Expenditures
Personnel
Goods and Services
CapitalInterest payment
Domestic Interest
External Interest
Additional Interest
Subsidies
Oil Subsidies
Non-Oil Subsidies
Grant Expenditures
Social Assistance
Others Current Expenditures/Others Expenditures
Development Expenditures
Rupiah Financing
Project aid
Regional Budget Expenditures
Balance Budget
Revenue Sharing Funds
General Allocation Funds
Special Allocation Funds
Special Autonomy
Rural Fund
Suspend
Source: Ministry Of Finance, 20182015

(billion Rupiah)
2016
2017

1,984,150
1,319,549
0
293,129
238,818
275,788
155,731
141,204
14,527
0
212,104
64,675
147,430
4,644
107,670
31,66400
0664,601
521,761
110,052
352,888
58,821122,074
20,7662,082,949
1,306,696
0342,447
304,242
206,567
191,218
174,016
17,2020177,754
43,687
134,068
8,537
53,404
22,525000776,253
705,459
109,076385,361
211,022
23,812
46,982

2,133,296
1,366,957
0343,656
294,716
226,144
219,196
202,878
16,3180
168,877
44,489124,388
5,532
58,962
49,87400
0766,339
678,596
95,377
398,582
184,637
27,74360,0001,806,515
1,183,304
0281,143
233,281
215,434
156,010
141,904
14,106
0
185,971
60,759125,212
4,262
97,151
10,052000623,140
485,818
78,053352,888
54,877
116,555
20,76672

1,864,275
1,154,018
0
305,142
259,647
169,474
182,761
167,753
15,0080
174,227
44,620129,6077,130
49,6146,024
0
0
0710,257
639,766
90,535385,361
163,870
23,812
46,6790

2,007,352
1,265,359
0
312,729
291,459
208,657
216,568
199,977
16,591
0
166,401
47,047
119,354
5,446
55,2978,803
00
0741,992
654,483
88,232398,582
167,668
27,74359,7670II.3.3 Budget Financing
The increase in state revenues and controlled spending helped to maintain the 2017 fiscal deficit at ahealthy level. The actual 2017 deficit was IDR 337.6 trillion or 2.5% of GDP, below the 2.9% deficit
targeted in the revised budget and at a safe and healthy level to maintain fiscal sustainability. The healthy37

fiscal conditions were also supported by a decline in the primary balance deficit to 0.9% of GDP, downfrom 1.0% of GDP in 2016.
The gap in the budget that appeared following the July revisions was plugged by foreign loans andthe issuance of SBN (Indonesia Government Bond). In 2017, the gross issuance of these state securities
in rupiah and other currencies reached IDR 708.9 trillion, while net issuances reached IDR 463.8 trillion.
Meanwhile, the drawdown of gross foreign loans in 2017 was IDR 52.8 trillion and it was slightly lower
than the IDR 54.3 trillion seen in 2016.
The issuance of SBN was split by denomination, timing and tenor, and was made in both in rupiah
and foreign currency denominations, namely the US dollar, euro and yen. This strategy was undertakenin the framework of safeguarding the stability of the money market and domestic liquidity. Concerning
timing, the issuance of foreign currency SBN began at the beginning of 2017 with US$ 3 billion,
equivalent to IDR 40 trillion. This was done to raise the potential for spending at the beginning of theyear and minimize instability in the domestic market. SBN were issued in tenors of three years, five
years, up to 15 years, with this variation in tenors chosen to deepen the market and divide the risk onmaturing SBN.
Overall, the financing through SBN and foreign loans kept government debt at a healthy level. The
Government’s debt ratio in 2017 was also maintained at a low level and in a safe corridor at 29.2% ofGDP, little changed from 2016’s level of 27.8% of GDP. Government debt sourced from SBN reached23.1% of GDP, while the remainder came from foreign loans. This ratio remains lower than that of othercountries in the region, including Malaysia, Thailand and the Philippines. The table below shows
Indonesia’s Budget Financing Position from 2015 until 2017:
Table 30: Budget Financing Position 2015-2017
ITEMS
Budget APBN
Surplus / Deficit
Financing, Net
Domestic Financing
Domestic Bank Financing
Government AccountMoratorium Funds
Domestic Non-Bank Financing
Privatization
Asset Management
Government Bonds, Net
Issuance of Government Bonds
Bonds Redemption and buyback
Domestic Loan
Gov. Capital Participation & Investment FundAid Channeling
Infrastructure Funds
National Education Development Fund
OthersForeign Financing (net)
Gross Drawing
Program Aid
Project Aid
Aid ChannelingAmortization
Financing Surplus/Deficit
Additional Debt Financing/Two Step Loan
ActualSurplus / Deficit
Financing, Net
Domestic Financing
Domestic Bank Financing
Government Account

38

2015

2016

(Billion Rp)
2017-222,507
222,507242,515000242,515350
0297,698
0
0
1,691-58,84400
01,620-20,008
48,6477,500
41,147-4,472-64,18300-296,724
296,724
299,251
19,01100280,240325
0364,8670
0
3,389-88,98500-5,0005,644-2,527
72,95935,77537,184-5,834-69,65200-397,236
397,236
412,656000412,656300
0467,3140
01,733-49,23400-10,500
3,042-15,420
57,50020,10037,400-7,716-65,20400-298,495
323,108
307,85800-308,341
334,503344,923
19,011
19,011-340,976
366,624
386,89100Moratorium Funds
Domestic Non-Bank Financing
Privatization
Asset Management
Government Bonds, Net
Issuance of Government Bonds
Bonds Redemption and buyback
Domestic Loan
CapitalAid Channeling
Infrastructure Funds
National Education Development Fund
Investment Funds
OthersForeign Financing (net)
Gross Drawing
Program Aid
Project Aid
Aid ChannelingAmortization
Financing Surplus/Deficit
Additional Debt Financing/Two Step Loan
Source: Ministry Of Finance, 2018

0
307,858342
0362,25700832-59,655
0
0
0
0
4,081
15,25083,82155,08528,737-2,576-65,995
24,613039

0325,912552
0407,259
0
0
1,052-84,08000-5,00006,129-10,420
63,42435,32528,099-5,118-68,726
26,16200386,891359
0441,82600648-49,25400-10,500
0
3,811-20,267
51,727
20,94830,779-6,869-65,125
25,6480

III. Tax Structure: Institution and Reality

III.1 Historical BackgroundIn 1600s, The Dutch government underThe VOC (VereenigdeOost-IndischeCompagnie) as thedelegating authority, issued policies to increase colonies revenue by raising some taxes fromagricultural
products tax. From early 1811 until late 1816, Sir Thomas Stamford Raffles of The Britainacted as agovernor changed the structure of land tax which had been applied by The Dutch into a new landtaxlandrent (land tax). Only in 1836 when The Dutch ruled the country for the second chance, Governor
Van Den Bosch began enforcing the cultuurstelsel (a so-called forced cultivation system) aimed toincreasing production of various commodities which had relatively strong demand in the world’s market.
Under suchcultuurstelsel, villagers/inhabitants were enforcedto sell their commodities only to the Dutch
Government with fixed price so that earnings from sales could be used to pay the land tax as well as
farm tax. But, export fell due to worldwide economic depression in 1930s, henceThe Dutch revenues
began to depend largely on taxes upon income and expenditure whereby the revenue was intended toenhance the development of The Dutch.
In 1967, a new system of tax collection called MenghitungPajakSendiritranslated as“to calculate
your own taxes” was introduced. Under this mechanism,not only couldtaxpayers calculate their tax
liabilities but also they could calculate the amount of tax payable reassessed by the tax authority by theend of the fiscal year – it was the pioneer of self-assessment system in Indonesia taxation system.
Fundamental yet comprehensive changes in Indonesia tax administration occurred in January 1,
1984: The first tax reform. Since then, laws wereregularly amended in order to address the rapidlychanging business environment within the country as well as to support the objectives of the government
in improving the investment climate while increasing tax revenues at the same time.
The first tax reform came into force with the implementation of three primary tax laws i.e.Law ofGeneral Tax Provisions and Procedures, Law of Income Tax as well asThe Law of Value-Added Tax(VAT) and Luxury-goods Sales Tax (LST). The reform continued the next year with the enactment of
Law of Land and Building Tax and Law of The Stamp Duty.
The year of 1994 was the commencement of the second tax reform whereby some regulations wereamended such are General Tax Provisions and Procedures, VAT and LST, Income Tax and Land andBuilding Tax. The second reform came into effect on January 1, 1995, with changes, additions anddeletions of several articles from previous legislation.
The third tax reform was in 1997 with the enactment of three tax laws. First,the Law of Tax Dispute
Settlement Agency under whicha new agency was established whilereplacing the legacy from Dutch
Law. Previously, provisions concerning appeal in Indonesia law systemwerementioned inRegeling van
het Beroep in Belastingzaken, lastly amended in 1959. Second, Law of Tax Collection with DistressWarrant and third, Law of Acquisition Duty of Rights on Land and Building. Besides, the new Tax
Court law was also enacted as a revision toLaw of Tax Dispute Settlement Agency. Based on Tax Court
Law, the administrative appeal body was no longer a part of the tax institution butbecame an institution
under Tax Court Secretary, Ministry of Finance where trialsare conducted in Jakarta, Yogyakarta, andSurabaya.
III.2 Tax System
III.2.1 Introduction
Tax is a compulsory contribution to the state which is payable by any individual or entity that is enforced
based on the law, without any direct benefit in return and is used for the maximum welfare of the40

people. Tax payments constitute the realization of the citizen obligation and the role of the taxpayer tothe state financing and national development. Such responsibility is in accordance with the selfassessment system implemented in the Indonesian.
Taxesin Indonesia are divided into two parts: Central Taxes and Local Taxes.Central Taxes
areadministered by the central Government which in this case is mostly managed by the Ministry of
Finance Directorate General of Taxes (DGT) as well as Ministry of Finance Directorate General of
Customs and Excise responsible for import duty, export duty, and excise. DGT administers taxes asfollows:
1. Income Tax
Income tax is imposed on anytaxable individual, entity or permanent establishmentupon theincome received or accrued within a taxable year comprises both resident and non-resident.
2. VAT
VAT is imposed on the consumption of taxable goods and/or taxable services within the territoryof Indonesia. Persons, corporations, or governments who consume taxable goods and/or taxable
services are subject to VAT. Basically, any goods and services are taxable goods and/or taxable
services, unless otherwise provided by the Laws.
3. LSTIn addition to VAT, the consumption of certain taxable goods classified luxuries, are also subject
to LST. Classified as luxury are:a. It is not a basic necessity; orb. Goods are consumed by certain communities; orc. In general, goods are consumed by high-income people; ord. It is consumed to show status; ore. If consumed can damage the health and morale of society, and disturb the public order.
4. Stamp
Duty
Stamp duty shall be imposed on the use of documents, such as letters of agreement, notarial
deeds, and receipts of payments, securities and securities, containing the amount of money or
nominal amount above a certain amount in accordance with the provisions.
5. LandandBuilding
Tax
Other
Than
Urban
and
Rural
Sector
Separate regulations are applied to plantation, forestry, and mining which consists of mineraland coal mining, oil, gas and geothermal mining, as well as other industries located in national
waters outside territory of regional area.
Local taxes administered by the regional Government are mainly structured as follows:
1. Provincial taxes:
a. Vehicle tax;
b. Transfer of Motor Vehicle Title;c. Motor Vehicle Fuel Tax;d. Surface Water Tax;e. Cigarette Tax.
2. District/City taxes:
a. Hotel Tax;b. Restaurant tax;
c. Entertainment Tax;
d. Advertisement tax;
e. Street lighting tax;
f. Non-metallic and rock mineral taxes;
g. Parking Tax;h. Groundwater Tax;
i. Swallow's nest tax;
j. Land and Building Tax on Urban and Rural Sector;
k. Acquisition of Land and/or Building Rights.

41III.2.2 Profile of Directorate General of Taxes
DGT is the responsible Echelon-I institution under Ministry of Finance to collect revenue with the vision
is to become the best state tax administrator to ensure state sovereignty and autonomy by collecting tax
revenue based on a high level of voluntary tax compliance and just law enforcement, providing modern
technology-based services to ease tax obligation fulfilment, building tax officers who are competent,
professional, and possessing high level of integrity, and providing competitive rewards based on
performance management system. DGT vertical units encompassesThe Secretariat of DGT, 4 Senior
Advisors, 14 Directorates, 33 Regional Tax Offices (RTO), 341 Tax Offices (TO), 207 Tax Service,
Dissemination, and Consultation Offices (TSDCO), and 5 Technical Implementing Units (TIU) all overIndonesia.
Figure 1: DGT Organization Chart
Directorate Generalof Taxes

Secretariat of The
Directorate General

Directorates

Senior Advisors

Regional Tax
Offices

Technical
Implementing UnitsTax Offices

Tax Services,
Dissemination andConsultation Office
Head Office

Operational Offices

The total number of personnel as of December 2017accounted for43,052 comprises 68% men and
32% women respectively.By age, most personnel (7,809 personnel) are at their 31-35 of age while 1,624
others aged 16-20 as the least group in population. Moreover, by educational level, 15,820 are
undergraduate, 5,637 are graduate, and 43 are post-graduate.Further, based on job position, thedistribution of personnel is depicted in the following graph.
Figure 2: Number of personnel by job position
Echelon Official,
4946, 11%Echelon Official
Tax Auditor
Appraiser, 259, 1%

Other, 20306, 47%

Tax Auditor,
5184, 12%

Appraiser
Computer Administrator

ComputerAdministrator, 97, 0%

Medic/Paramedic
Objection Reviewer

Medic/Paramedic, 2, 0%
Account
Representativ…

Account Representative
Objection Reviewer,
807, 2%Tax Bailiff
Treasurer

Operator Console,
470, 1%

Operator Console
Other

Tax Bailiff, 731, 2%
Treasurer, 525, 1%

Source: DGT, annual report 201742

III.2.3 Tax Revenue
Realized net tax revenue in 2017accounted for IDR 1,151.03 trillion which comprises 89.67%of thetarget. It saw growth of4.07% for income tax including oil and gas and 2.88% for income tax excluding
oil and gas respectively. More details as follow:
Table31:DGT Net Tax Revenue

Year

Non-Oil &Gas Income
Tax

VAT &LST

Land &
Building
Tax

Other
Taxes

2013
417.69384.72
25.3
4.94
2014
459.08408.83
23.48
6.29
2015
552.22423.71
29.25
5.57
2016
630.12412.21
19.44
8.10
2017
596.48480.72
16.77
6.74
Source: DGT Financial Statement 2013-2017 (audited), annual report 2017

Oil & Gas
Income
Taxes
88.75
87.44
50.11
36.10
50.32

(Trillion IDR)
Total
Excluding
Including OilOil & Gas
& Gas
Income Tax
Income Tax
832.65921.4
897.68985.13
1,010.75
1,060.86
1,069.87
1,105.97
1,100.71
1,151.03

III.2.4 Taxpayer Compliance: A Tax Return Submission Outlook
Tax compliance is fundamental to increase tax revenue.Regarding this matter, DGT performs a numberof efforts in achieving a high level of compliance. First, in order to be registered, a taxpayer is able toperform registration either using “e-registration” mechanism or simply visit the service counter in every
tax office. E-registration is the tool intended to increase the number of registered taxpayer. As seen on
following table 32, there are three types of taxpayers: individual, corporate, and treasurer. A treasurer
defines as a person acted as a state treasurer who runs the treasury in any unit of government institution– they also have to register themselves to get a Tax Identification Number (TIN).
Table 32: Registered Taxpayers
Type
2017
2016
2015
Individual
35,540,985
33,005,315
30,184,682
Corporate
3,110,887
2,912,882
2,674,406
Treasurer
499,731479,892
454,567
Total
39,151,603
36,398,089
33,313,655
Source: ODS Taxpayer Master File accessed on March 15, 2018, annual report 20172014
27,421,041
2,463,878
413,819
30,298,738

2013
24,821,429
2,276,876
390,013
27,488,318

However, DGT also performs another effort to the awareness of the unregistered taxpayer byintensifying tax education.Tax education program ranges from face-to-face formto various workshops,
disseminations, seminars, sports events, car free day and other outdoor activities or in the form of
indirect contact viawww.pajak.go.idwebsite, television and radio, or in the form of printed media suchas newspapers, school text books, booklets, and or by using online and social media. Those areintensively conducted by every unit in DGT. Hence, the goal is to increase the number of tax return
submission as shown on the table 33 below.
Table 33: Ratio of Annual Income Tax Return Submission
Description
2017
2016
2015
Taxpayers Obliged to Submit Tax Return
16,598,887
20,165,718
18,159,840
Annual Income Tax Return
12,057,400
12,256,401
10,975,909
Compliance Ratio
72.64%
60.78 %
60.44%
Source: DGT Compliance Dashboard accessed on July 17, 2018, annual report 2017

43

2014
18,357,833
10,854,819
59.13%

2013
17,731,736
9,967,904
56.22%

III.3 Current Tax Law and Regulation

III.3.1 Corporate Income Tax
III.3.1.1 Overview
Anentity is considered taxable if it has a presence and conducts business within the country. Suchdefinition includes a place of management, branch, representative office, office building, agent, factoryor workshop, construction or mining site. Such entity is required to register at the relevant DGT officefor their location/status at the time or shortly after establishment thereafter an annual income tax returnshould be filed including its worldwide income. In addition, tax paid offshore in relation to foreignsource income can be credited in the same tax year subject to certain limitations.
III.3.1.2 Tax Rates
A single flat rate of 25% has been applied since 2010. Public enterprises that satisfy a minimum listing
requirement of 40% and other conditions are entitled to a tax discount of 5% of the standard rate, giving
an effective tax rate of 20%. To be eligible, a public enterprise must have at least 40% of the outstanding
shares owned by at least 300 persons, each holding less than 5% of the paid-in shares, and this condition
must be maintained for at least 183 days in a taxable year. Small enterprises, i.e. corporate taxpayerswith an annual turnover of not more than IDR 50 billion, are entitled to a tax discount of 50% of thestandard rate for taxable income of up to IDR 4.8 billion.
III.3.1.3 Tax Residence
An entity is treated as a resident of Indonesia for tax purposes by virtue of having its establishment or
its place of management in Indonesia. A foreign company carrying out business activities through apermanent establishment (PE) in Indonesia will generally have to assume the same tax obligations as aresident taxpayer.
III.3.1.4 Taxable Income
The object of tax is income, which is defined as any economic benefit received or accrued by a taxpayer,
whether originating from within or outside of Indonesia, which is used for consumption, or which
increases the wealth of the taxpayer, in whatever name or form. A company income can be defined asfollows:
1.
2.
3.
4.
5.
6.

Gross profits from business;
Gains upon the sale or transfer of property (realized capital gains);
Interest, dividends, and royalties (subject to certain exceptions);
Rents;
Income from debt forgiveness and;
Surplus on revaluation of assets (favorable tax rate may apply).

Exchange gains or losses resulting from normal movements in currency exchange rates are, in mostcases, included in taxable income in the current fiscal year irrespective of whether they are realized or
unrealized. Gains or losses arising from a change in currency rates resulting from a government
regulation or decree (revaluation or devaluation) may be subject to special concessions.

III.3.1.5 Exempted Income
Excluded from the definition of taxable income are, among others:
1. Gifts or donations that are not related to the business or profession of the parties involved;44

2. Dividends received by a resident company from another resident company, provided:a. The dividend is sourced from retained earnings, the recipient owns at least 25 percent of
paid up capital.
b. The holding companies no longer need to undertake any other business activities due toremoval of the ”active business” criteria for holding companies. Therefore any interest
expense incurred in relation to the holding company’s investment will not be deductible
since the dividends received are not taxable.
3. Income received by venture capital companies in the form of profits or dividends, as long as
the investee companies meet certain requirements and the companies are not listed on the stock
exchange and.
4. Income From The capital invested by the Pension Fund, in the fields of certain specified byregulation of the Minister of Finance.
III.3.1.6 Capital Gains Tax
Capital gains or losses may come from sales of a company’s assets. It is calculated as the difference
between the sales proceeds and the tax written down value of the assets concerned. Capital gains areassessable while a capital loss is tax-deductible only if the asset concerned is used in the running of thebusiness, i.e. for obtaining, collecting, and securing assessable income. The exemptions are fortransactions in stock on the Indonesian stock market and on private property. The gain or loss is ignored
and tax is instead charged on the transaction value. The tax rate is 0.1% of transaction value of stock,
except for founder shares sold by founder 0.5% of transaction value. For Land and building, tax rate is
5 % of transfer value – final tax for individuals, foundations and corporations.
III.3.1.7 Dividend
Tax is withheld from dividends as follows:
1. Resident recipients. Dividends received from an Indonesian company by a limited liability
company incorporated in Indonesia as Perseroan Terbatas(PT), a cooperative, or a state-owned
company (BUMN/BUMD), are exempt from income tax if the following conditions are met:
the dividends are paid out of retained earnings; and the company earning the dividends holds
at least 25% of the paid-in capital in the company distributing the dividends;
2. Non-resident recipients: 20% (lower for treaty countries) final withholding tax is due on
dividends paid to a non-resident recipient.
If these conditions are not met, the dividends are assessable to the company earning the dividends at
the ordinary tax rates alongside the company’s other income. Upon declaration, dividends are subject to
Article 23 income tax at 15%, which constitutes a prepayment of the corporate tax liability for thecompany earning the dividends. Dividends received by firma, commanditaires, foundations and similarorganizations are always subject to 15% withholding tax. Dividends received by resident individual
taxpayers are subject to final income tax at a maximum rate of 10%.
III.3.1.8 Deductions
The taxable income is determined after deducting allowable deduction cost from gross income. The listof allowable deduction costsis as follows:
1. The costs of deriving, recovering and conserving such income including, the costs of materials,
wages, salaries of employees, employee bonuses, honoraria, cash allowances, interest, rent,
royalties, travel expenses, waste treatment costs, insurance premiums, administrative costs, andtaxes other than income tax;
2. Promotional and sales costs;
3. Bad debts, provided strict conditions are fulfilled;
4. Depreciation of the acquisition cost of property and amortization of costs incurred in obtaining

45

rights and other costs that have a useful life of more than one year;
5. “Zakat” donations if paid to an approved body by a Moslem individual or Moslem-owned
business;
6. Losses from the sale or transfer of assets;
7. Foreign exchange losses;
8. Costs of research and development performed in Indonesia;
9. Scholarships, apprenticeships and training costs;
10. Donations (as regulated by Government Decree) in relation to: National disasters, Research anddevelopment in Indonesia, The provision of educational facilities, and Development of sports;
11. The provisioning of reserves for re-forestation and closure/maintenance of industrial waste
storage locations are deductible for these business sectors (as further regulated by Minister ofFinance Decree);
12. Goodwill can be capitalized and amortized;
13. Office refreshments;
14. Prior year losses;
15. Contributions to a pension fund approved by The Ministry of Finance (MoF).
Additionally, entertainment costs are an allowable deduction where they relate to securing,acquiring and collecting income, but substantiation requirements exist. Full details of each expense are
required to be lodged with the annual tax return. Moreover, there are also some non-allowabledeductions cost from gross income as follows:
1. Benefits-in-kind (BIK) for instance, free housing, 50% of the acquisition and maintenance costsof certain company provided cars, except food and drink provided to employees in the workplace,
employee benefits required for job performance, such as protective clothing and uniforms,
transportation costs to and from the place of work, accommodation for ship crews and the likes,
the cost of providing BIKs in remote areas, and 50% of the acquisition and maintenance costs ofcellular phones;
2. Private expenses;
3. Non-business gifts and aid, except Islamic alms (“Zakat”);
4. Provisions: However, certain types of provision d. are claimable as deductible expenses:
provision for doubtful accounts for banking and financing companies, insurance claims provision
for insurance companies, deposit security provision for the Deposit Security Blanket Institution(LPS), reclamation provision for mining companies, forestation provision for forestry
companies, and area closure and maintenance provision for industrial waste processing
businesses;
5. Income tax payments;
6. Tax penalties;
7. Profit distributions;8. Employer contributions for life, health and accident insurance and contributions to unapproved
pension funds, unless the contributions are treated as part of the taxable income of employees;
9. Expenses relating to income which is taxed at a final rate, e.g., interest on loans relating to time
deposits;
10. Expenses relating to income which is exempt from tax, e.g., interest on loans used to buy shares
where dividends to be received are not subject to income tax;
11. Salaries or compensation received by partnership or firm as members where their participation
is not divided into shares.
III.3.1.9 Losses
Losses may be carried forward for a maximum of 5 years. However, for a limited category of businesses
in certain regions or businesses subject to certain concessions, the period can be extended for up to ten
years. The carrying-back of losses is not allowed whiletax consolidation also is not applicable.
III.3.1.10 Capital Allowances46Expenditure incurred in relation to assets with a beneficial life of more than one year are categorized
and depreciated from the month of acquisition by the consistent use of either the straight-line or the
declining-balance method, as follows:
1. Category 1: 50% (declining-balance) or 25% (straight-line) on assets with a beneficial life offour years. Examples of assets in this category are computers, printers, scanners, furniture andequipment constructed of wood/rattan, office equipment, motorcycles, special tools for specificindustries/services, kitchen equipment, manual equipment for agriculture, farming, forestry andfishery industries, light machinery for the food and drink industries, motor vehicles for public
transportation, and equipment for the semi-conductor industry.
2. Category 2: 25% (declining-balance) or 12.5% (straight-line) on assets with a beneficial life ofeight years. Examples of assets in this category are furniture and equipment constructed of metal,
air conditioners, cars, buses, trucks, speed-boats, containers and the like. The category also
covers machinery for agriculture, plantations, forestry activity, fisheries, and for food and drink,and light machinery, logging equipment, equipment for construction, heavy vehicles fortransportation, warehousing, and communication, telecommunications equipment, andequipment for the semi-conductor industry.
3. Category 3: 12.5% (declining-balance) or 6.25% (straight-line) on assets with a beneficial life of
16 years. Examples of assets in this category are machines for general mining other than in theoil and gas sector, machines for the textile, timber, chemical, and machinery industries, heavyequipment, docks and vessels for transportation and communication, and other assets notincluded in the other categories.
4. Category 4: 10% (declining-balance) or 5% (straight-line) on assets with a beneficial life oftwenty years. Examples of assets in this category are heavy construction machinery, locomotives,
railway coaches, heavy vessels, and docks.
5. Building: 5% (straight-line) on assets in the permanent building category with a useful life of 20
years; or 10% (straight-line) on assets in the non-permanent building category with a useful lifeof ten years. Included in the cost of the buildings is the land and building transfer duty
(DAL&BR) on building rights.
Intangible property or costs, including the cost of extending building use rights, rights for business
use, rights for use and DAL&BR on land rights with a useful life of more than one year, should beamortized on the following bases, as appropriate:
1. By using the straight-line or the declining-balance method at the rates specified in categories 1,
2, 3, and 4 under Depreciation, based on the useful life of the property:
Category 1: 4 years; Category 2: 8
years; Category 3: 16 years;
Category 4: 20 years.
Membership of the category is determined on the basis of the nearest useful life (e.g., an
intangible asset with a useful life of six years may fall under Category 1 or Category 2, while anintangible asset with a useful life of five years is under Category 1).
2. The costs of incorporation and expansion of the capital of an enterprise are claimed in full in theyear in which the expenditure is incurred or are amortized using either the declining-balance or
straight-line method at the following rates:
Category 1: 50% declining-balance; 25% straight-line
Category 2: 25% declining-balance; 12.5% straight-line
Category 3: 12.5% declining-balance; 6.25% straight-line
Category 4:10% declining-balance; 5% straight-line
3. Costs incurred for acquiring the right to oil and natural gas concessions with a beneficial life oflonger than one year are amortized using the production-unit method.
4. Costs incurred in the acquisition of mining rights, forest concessions, and other rights to exploit
natural resources and natural products with a beneficial life of longer than one year are amortizedusing the production-unit method but not may not exceed 20% per annum.
5. Costs incurred before the commencement of commercial operations with a useful life of longer
than one year are capitalized and amortized according to the rates set out.

47

Subject to DGT approval, corporate taxpayers and PEs who maintain Rupiah accounting may
undertake a revaluation of their non-current tangible assets for tax purposes. This may be carried out
once every 5 years. Each revaluation must include all business-related assets which are owned by thecompany and located in Indonesia, except for land and buildings (these may be omitted). Before
requesting the DGT’s approval, the company concerned must determine that it has settled all of its
outstanding tax liabilities
The revaluation must be conducted on a market or fair value basis. The market values must be
determined by a government-approved appraiser. These are subject to DGT adjustments if the values,in DGT’s view, do not represent the fair or market values of the assets. Once approved, the depreciation
applied to depreciable assets must be based on the new tax book values (approved values) on the basisof a full useful life (in other words, as if the assets were new). The excess of the fair market value over
the old tax book value of the revalued assets is subject to final income tax at a rate of 10%. Subject to
DGT approval, taxpayers facing financial difficulties may pay this tax in installments over 12 months.
Fixed assets falling under categories 1 and 2 must be retained at least to the end of their useful life.
Land, buildings, and assets falling under categories 3 and 4 must be retained for at least 10 years of therevaluation date. Additional final income tax at a rate of 10% is imposed on the original revaluation
gains if the revalued assets are sold or transferred before the end of this minimum retention period (thisdoes not apply to assets transferred because of forcemajeure, assets transferred based on government
decision/policy/court decision or assets transferred in the course of a tax-neutral business merger, aconsolidation, or a business split and fixed asset withdrawal because of irreparable damage).
III.3.1.11 Tax Payments
Resident taxpayer and PE of foreign companies have to settle their tax liabilities either by direct
payments, third party withholdings, or a combination of both. Foreign companies without a PE in
Indonesia have to settle their tax liabilities for their Indonesian-sourced income through withholding of
the tax by the Indonesian party paying the income.
1. Monthly tax installments (Article 25income tax) constitute the first part of tax payments to bemade by resident taxpayers and Indonesian PEs. As a prepayment of their current year corporate
income tax liability, a monthly tax installment is generally calculated using the most recent
corporate tax return. Special installment calculations apply for new taxpayers, finance lease
companies, banks and state-owned companies, listed companies and other taxpayers withperiodical reporting requirements;
2. The tax withheld by third parties on certain income (Article 23 income tax) or tax to be paid in
advance on certain transactions (e.g., Article 22 income tax on imports) constitute otherprepayments for the current year corporate tax liability of the income recipient or the party
conducting the import;
3. If the total amounts of tax paid in advance through the year (Articles 22, 23, and 25 income taxes)
and the tax paid abroad (Article 24 income tax) are less than the total corporate tax due, thecompany concerned has to settle the shortfall before filing its corporate income tax return. Sucha payment is referred to as Article 29 income tax.
4. Certain types of income earned by resident taxpayer and Indonesian PE are subject to final
income tax. In this respect, the tax withheld by third parties (referred to as Article 4.2 incometax) constitutes the final settlement of the income tax for that particular income;5. For foreign companies without a PE in Indonesia, the tax withheld from their Indonesia-sourced
income by the Indonesian party paying the income (Article 26 income tax) constitutes a final
settlement of their income tax due.
III.3.2 Individual Income Tax
III.3.2.1 Overview
The extent of the Indonesian income tax liability depends upon the individual’s residence status inIndonesia. Resident individuals are taxed on their worldwide income, regardless of where such income48

arises from or for whom work or service is performed. For Indonesian-source income, there is anextensive framework of withholding taxes so that income tax is often collected by deduction at source,
for example in relation to employment income, interest, dividends, royalties, rent and income fromsales of property, and listed shares.
Non-resident individuals are exempted from the worldwide income reporting obligation and tax is
imposed only on income derived in Indonesia. Deductions are limited to individual personal allowances.
Resident individual taxpayer who receive or earn annual income exceeding the income threshold mustregister with the tax office and file annual income tax returns. The tax return should state theindividual’s income, including compensation from employment, investment income, capital gains,
overseas income, and other income. Tax return also provides a summary of the individual’s assets andliabilities.
A family is generally regarded as a single tax reporting unit with only a single TIN in the name ofthe head of the family (typically the husband). His wife and his dependent children’s income must bereported on the same tax return in his name. A married woman has two options. She can choose to have
her own tax identification number and report her own income tax return separately from her husband.
Otherwise, she can merge her income to her husband’s tax return.
III.3.2.2 Tax Rates
Most income earned by individual tax residents is subject to income tax at the normal tax rates:
Table 34: Individual Income Tax Rate
Taxable Income
Up to IDR 50,000,000
Above IDR 50,000,000 up to IDR 250,000,000
Above IDR 250,000,000 up to IDR 500,000,000
Above IDR 500,000,000
Source: Law of Income Tax.

Rate
5%
15%
25%
30%

III.3.2.3 Main Personal Relief
The amount of annual non-taxable income (PTKP) for resident individualsfirstly implemented on June
27 2016 are as follows:
Table35: Individual Main Personal Relief
Amount (IDR)
Taxpayer
SpouseEach dependent (max of 3)
Occupational expenses (5% of gross income, max Rp.500,000/month)
Employee contribution to Jamsostek for pension fund (2% of gross income)Pension maintenance expenses (5% of gross income, max Rp.200,000/month)
Source:Law of Income Tax.

54,000,000
4,500,000
4,500,000
6,000,000
Full amount
2,400,000

III.3.2.4 Tax Residence
Indonesian tax law distinguishes between resident and nonresident taxpayers. Residents are defined as
individual if he/she fulfills any of the following conditions:a. resides in Indonesia;
b. presents in Indonesia for 183 days or more in any continuous 12-month period;c. Presents and resides in Indonesia during the fiscal years and intend to remain in Indonesia.
Nonresident taxpayers are individuals present in Indonesia for fewer than 183 days with no intention
to reside. Nonresidents need not register for tax purposes. Resident individual taxpayers are taxed on49their worldwide gross income less allowable deductions and nontaxable income. Non-resident
employees in the oil and gas sectors are taxed on deemed salaries based on job titles. The provisions oftax treaties may override these rules.
III.3.2.5 Taxable Income
Income is defined as any economic benefit received or accrued by a taxpayer that is used for
consumption or that increases the wealth of the taxpayer, in whatever name or form. The following
types of income are subject to tax:
1.
2.
3.
4.
5.
6.
7.

Compensation or payments received or earned in connection with work or services;
Lottery, prizes, and awards;
Gross profits from individual business activities;
Gains from the sale or transfer of assets;
Refunds of tax payments already deducted as expenses;
Interest;
Dividends, in whatever name or form, paid by a corporation, payments of dividends by aninsurance company to policy holders.

III.3.2.6 Benefits-in-kind
Benefits in kind received by employees, including discounted or free housing, are not taxable to theemployee nor deductible to the provider/employer. However, company cars and cellular phones
provided to the employee are deductible at 50% of the acquisition cost by way of depreciating thoseassets over their useful lives (8 years and 4 years), while cellular phone refill vouchers and repair
expenses can be claimed as deduction at 50%. A full deduction however applies to food and drinks
provided to employees in the workplace and employee benefits required for job performance such asprotective clothing and uniforms, transportation costs to and from the place of work, accommodation
for ship crews and the like, and also for housing provided in remote areas approved by the Minister ofFinance.
III.3.2.7 Tax Payments
A substantial part of individual income is collected through withholding by third parties. Employers are
required to Withhold Article 21/26 income tax on a monthly basis from the salaries and othercompensation payable to their employees. If an employee is a resident taxpayer, the amount of tax
withheld should be based on the normal tax rates (as set out above). If he/she is a non-resident taxpayer,
the withholding tax is 20 percent of the gross amount (and may be set at a lower rate under a tax treaty).
Various other payments to individuals also call for withholding tax obligations from the payers. These
include, among others: pension payments made by government-approved pension funds; severance
payments; old-age security saving payments from Jamsostek; scholarships; fees for services;prizes/awards. Typically the amount of tax withheld from this income is based on normal tax rates. Feesfor certain professionals, such as lawyers, notaries, accountants, architects, doctors, actuaries andappraisers, are required to be calculated based on 50% of the gross income.
III.3.3 Tax rate for Small and Medium Enterprises and Individual BusinessGovernment Regulation Number23of 2018 concerning Income Tax on Income from Business
Received/Earned by Taxpayer with Certain Gross Turnover has been enactedon 8 June 2018 and comeinto effectbeginning from 1 July 2018 – it revoked the lastly applied Government Regulation Number
46 of 2013. The regulation stipulates that individual(individual businesses with small to medium range
trading and services activities other than professional services, such as lawyers, accountants, translators,
insurance agents, etc.)as well as corporate taxpayers other than permanent establishments having annual
income up to IDR 4.8 billion are subject to final tax at 0.5%. However, taxpayers can only benefit fromsuch new regulation only for some time limitations: 7 years for individual; 4 years for cooperative,

50

limited partnership, or firm; and 3 years for Limited Liability Company. Excluded also on the basis oftypes of taxpayers among others are taxpayers who choose to apply normal tax rate based on Article 17
or 31E Law of Income Tax, individual taxpayers in the form of limited partnerships/firms delivering
services categorized as freelance business activities, taxpayers who benefit from tax holiday or tax
allowance, and as already mentioned, taxpayers in the form of PEs.
III.3.4 Withholding Tax
Income tax collection is mainly conducted through withholding taxes system whereby a particularincome item is subject to withholding tax, the payer is generally held responsible for collection bywithholding the tax.
III.3.4.1 Article 21 – Salaries and Other Payments to Individuals
Employer is required to withhold Article 21 income tax from the salaries payable to their employees andpay the tax to the State Treasury on their behalf. The same withholding tax is applicable to otherpayments to non-employee individuals (e.g., fees payable to individual consultants or service providers).
Resident individual taxpayers without TIN are subject to a surcharge of 20% in addition to the standard
withholding tax.
III.3.4.2 Article 22 - Imports
Article 22 income tax is typically applicable in the following events:
1.
2.
3.
4.

Importation of goods;
Sale of goods to the government calling for payments from the State Treasury, the State
Budget General Directorate, or certain state-owned companies;
Sale/purchase transactions of steel, automotive, cigarettes, cement, and paper products.
Sale/purchase of luxurious goods.

III.3.4.3 Article 4 (2) – Final Income Tax
Resident companies, PEs, representative of foreign companies, organizations, and appointed individuals
are required to withhold final tax from the following gross payments to resident taxpayers and PEs:
Table 36: Final Income Tax Rate
Description
Rental of land and/or buildings
Proceeds from transfer of land and building rightFees for constructions work performanceFees for constructions work planning
Fees for constructions work supervisionInterest on time or saving deposits and on Bank Indonesia Certificates (SBIs) otherthan that payable to bank operating in Indonesia and to government-approved
pension funds
Interest on bonds other than that payable to banks operating in Indonesia andgovernment- approved pension funds
Proceeds from sale of shares on Indonesian stock exchanges. Founder shareholders may
opt to pay tax at 0.5% of the market price of their shares upon listing, otherwise, gains on
subsequent sales are taxed under normal rules
Income from lottery prizes
Certain income received by individuals and corporates (except PEs) with gross turnoverof not more than IDR 4.8 billion in one fiscal year.

Tax Rate
10%5%
2/3/4%
4/6%
4/6%
20%

15%
0.1%

25%
0.5%

III.3.4.4 Article 23 – Residents
Certain types of income paid or payable to resident taxpayer are subject to Article 23 income tax at a
rate of either 15% or 2% of the gross amount. Income Tax Article 23 sets 15% rate of the gross amount51

on dividends, interest (including premiums, discounts and loan guarantees fees), royalties, prizes andawards.
III.3.4.5 Article 26 – Non-Residents
Resident taxpayers, organizations, and representatives of foreign companies are required to withhold
20% tax from the following payments to non-residents:
1. On Estimated Net Income (ENI), being a specified percentage of the gross amount:
Table 37: Non Resident Estimated Net Income
Description
Insurance premiums paid to non-resident insurance companies:

ENI

By the insured
By Indonesian insurance companies
By Indonesian reinsurance companies
Sale of non-listed shares by non-residents
Sale for by the non-residents holding of Indonesian of a conduit company
companies hares/where PE serves as an intermediary

50%
10%
5%
25%
25%

Effective Tax Rate
20%
2%
1%
5%
5%

2. On gross amount, the object of tax would be in the form of dividend; interest including premiums,
discounts (interest), swap premiums, and guarantee fees; royalties, rents and payments for the useof assets; fees for services, work, and activities; prizes and awards; and pensions and any otherperiodic payments. After-tax profit of a PE is exempted from withholding tax if it reinvest inIndonesia in the form of equity participation in a company established and domiciled in Indonesia
for which such PE acts as the founder or one of the founders.
III.3.5 Income Tax on Certain Income in the Form of Net Assets
To provide legal certainty and simplicity while improving taxpayer’s compliance after Tax Amnesty
Program, Government Regulation Number 36 of 2017 concerning Imposition of Income Tax on Certain
Income in the form of Net Assets Treated/Deemed as Income, Minister of Finance Regulation Number
165 of 2017 Tax Amnesty and Regulation Implementation, and Director General of Taxes Regulation
Number 23 of 2017 concerning Procedures for Submission of Monthly Final Income Tax Return on
Disclosure of Net Asset have been enacted, further known as Voluntary Asset Disclosure – Final Tax
Rate policy.
Final rate of 25% applies for corporate taxpayer, 30% for individual taxpayer, and 12.5% for certain
taxpayer. Meanwhile, types of income belong to this category are:
1. Additional net assets as referred to Article 13 par. (4) of Tax Amnesty Law;
2. Net assets owned by the end of preceding tax year which had not been disclosed or less disclosed
as referred to Article 18 par. (1) of Tax Amnesty Law;
3. Net assets owned by the end of preceding tax year which had not been disclosed in Income Tax
Return as referred to Article 18 par. (2) Of Tax Amnesty Law.
III.3.6 Income Tax on Land/Building Rent
Based on Government Regulation Number 34 of 2017 concerning Income Tax on Income from Rent ofLand and/or Building, enacted on 2 January 2018, income derived from rental activity of land and/or
building either by individual or corporation that holds land rights from related investors through theimplementation of Build-Operate-Transfer (BOT) agreement is subject to 10% final tax rate.
III.3.7 Value Added Tax and Luxury-Goods Sales Tax
Eitherentity or individual, in any form, which in the course of his operationsconsisting production,
import or exportof taxable goods, trading activities or taxable services, is required to register as a52

Taxable Entrepreneur to DGT,however, registration by non-resident is not allowed.
III.3.7.1 Taxable Goods and Services
VAT is typically due to events involving transfers of taxable goods or provisions of taxable services in
the Customs Area. Such taxable events include:
1. Deliveries of taxable goods in the Customs Area by an enterprise;
2. Importation of taxable goods;
3. Deliveries of taxable services in the Customs Area;
4. Use or consumption of taxable intangible goods originating from outside the Customs Area in
the Customs Area;
5. Use or consumption of taxable services originating from outside the Customs Area in the
Customs Area;
6. Export of taxable goods (tangible and intangible) by an enterprise;
7. Export of taxable services by an enterprise.
Delivery of taxable goods are defined broadly and include the following: deliveries of a title to taxable
goods according to an agreement; transfers of taxable goods according to a leasing-with-option or
finance-lease agreement; deliveries of taxable goods to an intermediary trader or an auction official;own-use and/or free gift of taxable goods; remaining taxable goods and certain assets originally not forsale at a company’s dissolution; deliveries of taxable goods within a company (e.g., between branches,or between the head office and its branches) unless the company, at the DGT’s approval, centralizes
its VAT reporting; deliveries of taxable goods on consignment; deliveries of taxable goods by a taxable
entrepreneur in the framework of sharia-based financing, whereby the deliveries are deemed to takeplace directly from the taxable entrepreneur to the party in need of the taxable goods.
Several exemptions apply on goods for basic necessities, mining taken from natural resources, foodserved in hotels and restaurants including food and drinks provided by catering services, money, goldand securities. Some other exemptions on broad area of services are medical, social and religious
services, postal and account transfer services, banking, insurance and non-banking financial leasing,educational services, finance leasing, art and entertainment services, radio and television broadcasting
services other than advertisements, public transportation services in land, sea and domestic airtransportation, manpower and recruitment services, hotel and boarding house services, services provided
by the government related to public administration and formality requirements, parking services, public
telephone (by coin) services, food and catering services.
III.3.7.2 Tax Rates and Tax Base
Normal rate of 10% is imposed on importers, manufacturers, wholesalers and retailers as well as on theprovision of services. While VAT law and regulation permit amendments of the rates for individual
items, products with rate other than 10% are cigarettes and used cars. Services such as package deliveries
and travel agents are taxed at 1%. Export of taxable goods are effectively excluded from VAT by being
subject to the tax at a 0% rate.
VAT for a particular taxable event is calculated by applying the VAT rate to the relevant tax base.
In most cases, the tax base is the transaction value agreed between the parties concerned. For certain
events or situations, other parameters must be used as the tax base, including:
1. Market value for transactions between related parties, remaining inventories of taxable goods
at a company’s dissolution, and sales of (non-inventorial) assets originally not for sale;
2. Cost of sales for own-use or free gifts and internal deliveries of taxable goods (e.g., between
branches, from the head office to branches);
3. Auction price for deliveries of taxable goods to an intermediary trader of an auction officer;
4. Agreed price for deliveries of taxable goods through an intermediary trader;53

5. Average result per film for movies;
6. IDR 12 million per copy of imported movies;
7. 20% of total costs incurred or paid, exclusive of the acquisition price of land, for the selfconstruction of a building;
8. Retail selling prices for deliveries or imports of tobacco products;
9. 10% of the actual billing for package shipment services;
10. 10% of the actual billing for tour and tourism agency services whose deliveries are not based oncommissions;
11. 20% of selling price on the deliveries of gold jewelry, including services carried out by the factory
in relation to gold jewelry;
12. 10% of actual billing on the deliveries of freight forwarding services in which billing includes
freight charges.
III.3.7.3 Relief for Export Manufacturers
A number of relief schemes allows export manufacturers to operate on a virtually VAT and duty-freebasis including bonded zones, economic development zones (KAPET) and free trade zones. For example,
free trade zones (Sabang, Batam, Bintan, and Karimun)as well as free ports are located in Indonesia but
are considered outside the customs area thereby goods brought into these areas are exempted fromimport duties, VAT and LST. Business activities whichare able to be carried out in a free trade zone,
among others, are trade, services, mining, transportation, banking and manufacturing.
III.3.7.4 VAT Reporting
A company carrying out business activities through a number of business units/branches in the working
areas of different tax offices must have its units/branches registeredto relevant tax offices depending on
the location/domicile. Such mechanism applied is in accordance with the context that internal deliveriesof taxable goods within a company line of business are subject to VAT. Hence, corporation andindividual as taxable entrepreneurs are obliged to report their business activities as well asto settle their
VAT liabilities on a monthly basis.
Upon approval from DGT, a company is permitted to centralize its VAT reporting and thereby isallowed to exclude internal deliveries of taxable goods from VAT. In order to obtain such approval,
several conditions must be met including centralization of sales administration,however, such company
is also allowed whether to choose to centralize their VAT reporting without fulfilling other conditions
if it files e-tax returns. Also, companies registered to Special Tax Office, Large Tax Office, and Medium
Tax Office are required to centralize their VAT reporting.
III.3.7.5 Input-Output Mechanism
VAT liabilities are settled by an input-output mechanism. First,a vendor of taxable goods or a taxable
service typically charges VAT to its buyer. From the vendor’s perspective, it is regarded as an output
tax. Second, the buyer has to pay VAT to the vendor as an input tax. In such input-output mechanism,
both vendor and buyer must be registered as taxable entrepreneurs.
Input tax can be credited against output tax. A vendor isallowed to offset the output tax against its
input tax on the acquisition of taxable goods or taxable services, and so is the buyer. If the amount ofaccumulated output tax (output tax derived from many transactions) for a particular month exceeds theamount of accumulated input tax for the same period, taxable entrepreneur has to settle the amountdifference by the following month. On the contrary, if the amount of accumulated input tax for aparticular month exceeds the amount of accumulated output tax, such taxable entrepreneur may ask fora refund at the end of tax year or else he could carry over excess amount oftax paid (input tax)for
following months.
With regards to invoice used for the input-output mechanism, DGT has begun implementing the use

54

of electronic VAT invoices (e-VAT invoice) for all registered entrepreneurs since 1 July 2016. It isregarded the samelegal invoice withpaper-based invoice and taxable entrepreneur shall use IDR
currency and apply hisdigital signature.
III.3.7.6 VAT Refund
Refund application can be filled and submitted at the end of an accounting year. DGT thenwoulddetermine on a refund application within 12 months by conducting a VAT audit. Relevant
supporting documents for a VAT refund must be submitted to DGT within a month after the date ofapplication. In addition, an early VAT refund is applicable to certain taxpayers regarded obedient.
III.3.8 Luxury-Goods Sales Tax (LST)The VAT law also imposes LST on delivery of luxury goods by foreign manufacturers into Indonesia
as well as on the importation of luxury goods by residents. Rates vary depending on the category of thegoods (up to 200% rate) and suchLST is imposed only once by multiplying the applicable rate by thesales/import price excluding VAT.
Similar to VAT, no LST is imposed on the export of luxury goods, hence, purchase of luxury goods
cannot be credited against the collectable VAT when suchluxuries are subsequently sold. In broad terms,
some of the main types of goods are subject to LST includes passenger vehicles, alcoholic beverages,
certain food and non-alcoholic beverage products, household appliances and electronic goods, cosmetics,
luxury homes and apartments, and so forth.
III.3.9 Stamp Duty
Under Law Number 13 of 1985, stamp duty is nominal and payable as a fixed amount of either IDR
6,000 or IDR 3,000 on certain documents. Examples of documents subject to stamp duty are as follows:
1. Letters of agreement and other letters (such as authorization letters, letters bestowing gifts, ordeclarations) which are prepared for the purpose of being used as evidence of act, fact, orcondition of a civil nature.
2. Notary’s deeds and their copies.
3. Deeds prepared by a designated land notary (“PejabatPembuatAkta Tanah”).
4. All documents bearing a sum of money which:a. State the receipt of money;b. State the recording or deposit of money in a bank;c. Contain notification of a bank balance;d. Contain the acknowledgement of debt wholly or partly paid or compensated;e. Are in the form of valuable documents such as drafts, promissory notes, or acceptances;
f. Are in the form of securities, in whatever name or form;g. Are in the form of cheque.
5. Documents to be used as instruments of evidence before a court:
a. Ordinary letters or internal papers
b. Paper originally exempt from stamp duty on the basis of their purpose of use, if they serve
other aims or are used by other parties, and deviate from their original purpose.
The IDR 6,000 rate is applicable to (a), (b), (c), and (e). For (d), the rate is IDR 6,000 when themoney value stated in the document is more than IDR 1 million, and IDR 3,000 when the value isbetween IDR 250,000 and Rp1 million. Values below IDR 250,000 are not subject to stamp duty. For
cheque, the rate is IDR 3,000 regardless of the monetary value stated.
III.3.10 Land and Building Tax Other than Urban and Rural Sectors
Minister of Finance Regulation Number 131 of 2017 concerning Administration on Land and Building

55

Tax on Mining Sectors for Petroleum, Natural Gas, and Geothermal regulates the payment procedureand its adjustment of terminology to provision of Geothermal Law. Moreover, Minister of FinanceRegulation Number 81 of 2017 and Number 82 of 2017 regulate deduction of administration fines ofland and building tax along with deduction/cancellation of tax assessment/collection and criteria for
granting deduction of land and building tax respectively. As depicted on the following table, there were
10,179 objects registered on respective land and building tax.
Table 38: Object of Land and Building Tax
Sector
2017
2016
2015
2014
2013
Plantation
4,401 4,275
8,637 13,663 14,115
Forestry
683
647
562
569
517
Mining5,095 4,760
4,803
4,252
2,533
Total
10,179 9,682 14,002 18,484 17,165
Source: Directorate of Extensification and Valuation, annual report 2017

III.3.10 Tax Assessment
Indonesian taxation relies on a self-assessment system under which taxpayers are trusted to calculate,pay, and report their own taxes by themselves in accordance with prevailing tax laws and regulations.
However, the DGT may issue tax assessment letters to a particular taxpayer if it finds that, based on a
tax audit or other information the taxpayer has not fully paid its tax liabilities. A tax assessment lettermay also be issued by the DGT to a taxpayer who ignores a warning letter to file a tax return in a
specified period. Failure to maintain books in accordance with the prescribed standards is anothercondition that may lead the DGT to perform an official tax assessment.
III.3.9.1 Notice of Tax Assessment
A notice of tax assessment pertains only to one specific tax for one particular tax period or year which
includes:1. Notice of Tax Collection (NTC) which is a form of a notice for the collection of tax andoradministrative penalties in the form of interest and or fines;
2. Notice of Tax Underpayment Assessment (NTUA) which specifies a principle amount of tax
payable, amount of tax credit, a principle amount of underpayment tax payable, amount ofadministrative penalties, and total of tax due;
3. Notice of Additional Tax Underpayment Assessment (NATUA) which specifies an additionalamount of tax payable over previously issued tax assessment;
4. Notice of Nil Tax Assessment (NNTA) which specifies the principle amount of tax payable is as
much as the amount of tax credit, or, there is no tax payable and no tax credit;
5. Notice of Tax Overpayment Assessment (NTOA) which specifies an amount of tax overpayment
as a result of the amount of tax credit is greater than the tax payable, or the tax paid should nothave been payable.
III.3.11 Tax Audit
According to Article 29 Law of General Provisions and Tax Procedures, DGT is authorized to perform
audit to assess tax compliance, in the form of risk-based audit and routine audit, and for other purposeswith respect to the implementation of tax laws and regulations. Tax compliance audit is generated by 2
condition of cases. The first condition is mandatory requirement by tax law with regards to thetaxpayer’s rights and obligations, and the second condition is that DGT detectssome risks or tax gaps
from the business sector or specific tax payer as a result of either bottom-up risk analysis or top-downrisk analysis.
III.3.11.1 Objectives of Tax Audit
In the framework of exercising administrative supervision, DGT shall undertake audit for the purpose56

of assessing tax compliance and for other purposes in respect of the implementation of the tax laws andregulations as structured below.
1. Audit for the purpose of assessing taxpayer’s compliance:a. overpayment tax return including those that have been granted preliminary tax returns;
b. loss-reported tax return;c. overdue or not-submitted tax return (beyond the time period specified in the Letter ofReprimand) delivered;d. performing a merger, consolidation, division, liquidation, dissolution, or having intention
to leave Indonesia permanently;
e. Tax return which meet the selection criteria based on the results of the analysis (risk-based
selection) is regarded as non-compliant.
2. Audit for other purposes:a. To issueTIN ex-officio;
b. To terminatea taxpayer’s TIN;
c. To confirm or revoke taxable person for VAT purposes;d. Taxpayer lodges objection;e. To collect material for determination of net deemed-profit;f. To verify data and/or information;
g. To determine whether taxpayer is located at remote area;h. To designate one or more places where VAT is payable;
i. Audit is in the framework of tax collection;
j. To determine the commencement of production or extending the time period of loss
compensation relating to granting tax incentives; and or
k. To fulfill information request from treaty partner country with respect to theimplementation of exchange of information of the tax treaty.
III.3.11.2 Closing-Conference
In the final stage of tax audit, tax auditors will provide the taxpayer a written notification of the findings
containing a proposed tax audit corrections. Then, taxpayer shall respond within 7 days – in some cases,
as auditor’s discretion, time limit can be extended up to 21 days. Within 3 weeks, a final discussion
about the tax audit findings (closing-conference) will be held between tax auditors and the taxpayer.
A closing-conference serves as the last opportunity for the taxpayer to reassert its position withregards to the tax audit corrections by presenting relevant supporting documents. Tax auditors maychange some of proposed corrections in light of the taxpayer’s response to audit findings notificationand the closing-conference discussion. The results of such final discussion are then summarized into aclosing-conference document which states agreement or disagreement from the taxpayer. By the endof the closing conference, tax auditors and the taxpayer have to sign the closing-conference document.
III.3.12 Tax Investigation
Tax investigation is the ultimate tax enforcement method conducted when other approaches e.g.
reminder, counseling, and audit are considered to be ineffective. It can only be conducted by Certified
Tax Officers with technical support from the Police. In details, tax crime is regulated on article no. 38,
39, and 39A of the General Law.
Generally, tax crime can be divided into 2 categories:
1. Pure tax crime case.It is mostly related to invoice based on fictitious transaction and otherfictitious tax documents.A clear proof of crime usually detected within tax administration. For
such cases, tax investigation takes the first place to conduct a covered preliminary-investigation;
2. Escalated tax fraud case.It is the kind of fraud conducted by evading tax amount or tax obligation.
Such crime requires tax investigation to be preceded by other enforcements, yet in a preliminary-57

investigation, tax payer can avoid investigation by declaring a self-correction or an adjustment
related to data or information in accordance with tax regulations.
As stated in the law, there are four major modus operandi of tax crime, as follows:
1. By issuing or using tax invoice which is not based on real transactions;
2. By withholding tax, but do not pay such withheld amount;
3. By submitting incorrect or incomplete information Tax Return;
4. Not submitting the Tax Return.
III.3.13 Tax Dispute Settlement
Judicial process of tax administration can be divided into 2 main categories: administration of impartial
justice in DGT and Partial Justice in Tax Court and Supreme Courtas shown in the following table.
Impartial Justice in DGT covers Objection, Correction, Deduction, Annulment, and Cancellation ofTax Assessment, while Partial Justice in Tax Court and Supreme Court covers Appeal, Lawsuit andReview.
III.3.13.1 Impartial Justice in DGTIn the implementation of the provisions of the tax law and regulations, there are several legal measures
which could be taken by taxpayers if they disagree with the tax assessment, namely:
1. Tax objection over NTUA, NATUA, NNTA, and NTOA, Notice of Land and Building Tax
Payable, Notice of Land and Building Tax Assessment, Notice of Acquisition Duty of Right on
Land and Building Assessment Underpayment, Notice of Additional Acquisition Duty of Righton Land and Building Assessment Underpayment, Notice of Acquisition Duty of Right on Land
and Building Assessment Overpayment, Notice of Nil Acquisition Duty of Right on Land andBuilding Assessment, and other withholding tax by third parties;
2. Correction of notice of tax assessment, Notice of Tax Collection (NTC), and decrees for any
error in writing, miscalculations, and mistake in the application of certain provisions of tax law
and regulations;
3. Deduction or annulment of administrative penalties either due to the negligence of taxpayers
or not;4. Deduction or cancellation of incorrect tax assessment notice;
5. Deduction or cancellation of incorrect NTC;
6. Deduction of administrative penalty for Land and Building Tax;
7. Deduction of payable for Land and Building Tax and Duty of Rights on Land and Building
Acquisition; and8. Cancellation of tax audit result or Notice of Tax Assessment resulted from audit thatconductedwithout notification of tax audit finding or without closing-conference with taxpayers.
III.3.13.2 Partial Justice in Tax Court and Supreme Court
III.3.13.2.1 Appeal and Lawsuit
In relation to tax disputes in the partial administrative court process, taxpayers can only file appeals
and lawsuit to Tax Court. Appeals is submitted based on the Decree of Objection, while the lawsuit
is submitted by taxpayers against:
1.
2.
3.
4.

Execution of Distress Warrant, Notice of Seizure, or Auction Announcement;
Decision on prevention in framework of tax collection;
Decision pertaining to the execution of tax;
Decision, other than those stipulated in Article 25 par. (1) And Article 26 Law ofGeneralProvisions and Tax Procedures; or
5. Issuance of notice of tax assessment or decision on tax objection that is not in accordancewith the procedures set out in tax law provisions.

58III.3.13.2.2 Judicial Review
Both taxpayers and DGT have the rights to take extraordinary legal attempts to the Supreme Court,
known as Review. Review can be submitted within a maximum period of three months since a
decision has been delivered by a Tax Court.Further, Review is filed by DGT to the Supreme Courtin form of Memory of Review. Upon the Review filed by taxpayers to theSupreme Court, DGT shallbe obliged to respond in the form of Counter Memory of Review.
Appeal decisions or claim from Tax Court could be filed for Review by taxpayers and DGT for
several reasons, namely:
1.

2.
3.

4.
5.

The Tax Court verdicts are based on falsity or deceit of the counterparty which is revealed
after the cases have been ruled or based on evidence which then declared as false by thejudges;There is new and decisive written evidence, which if presented at the trial in the Tax Court
may result in different verdict;Some issues, that were not charged or more than what have been charged, have been
granted except that issues have been terminated under the Article 80 paragraph (1) letter b
and c of Tax Court Law;
Concerning a part of the lawsuit which is yet to be decided without being given duly
consideration; andThere is a verdict which clearly is not in accordance with the provisions of prevailing law
and regulations.

III.3.13.3 Other Dispute Settlements and Granting of Legal AssistanceIII.3.13.3.1 Case HandlingCase handled by DGT includes lawsuit, bankruptcy, state property disputes, state administrative
lawsuit, and those related to information dispute resolution to the Public Information Commission.
In general, types of lawsuit filed by taxpayers are:1.

2.

Investigation, preliminary investigation, and tax crime investigation, with several caseexamples, namely:
a. Audit period exceeds the standard audit period stated in the provisions of tax law andregulations;b. Understanding of tax crime as ultimumremedium, in which taxpayers believe that audit
must be conducted prior to preliminary investigation, and correspondingly,
investigations must be preceded by a preliminary investigation;c. taxpayers raise the issues on tax stipulation expiration (Article 13 Law onGeneral
Provisions and Tax Procedures) and prosecution of tax crimes (Article 40 Law on
General Provisions and Tax Procedures), in which taxpayers consider that if an annual
tax return is not disputed for five years, then it is regarded legal, thus consequently
cannot be audited or investigated;
d. Related to the granting of power of attorney by taxpayers to tax consultants to represent
them in investigation process, in which the tax consultants consider themselves could
properly represent the taxpayers without obtaining tax consultant permit;
e. Pre-trial request by taxpayers who are under investigation or suspected of committing
tax crime.
Tax debt collection related to confiscation, hostage-taking/gijzeling, and bankruptcy, withseveral cases as follows:a. Tax offices are late in collecting tax arrears, for example, being late in carrying out
auction for confiscated assets;b. Schemes where company management structure are strategically changed in an attempt
to escape responsibility as tax bearers;

59

3.

c. Wrongful confiscation of taxpayers’ assets by tax offices;d. Resistance from Taxpayers subject to hostile-taking/gijzeling by submitting pretrial
requests;e. Taxpayers use bankruptcy scheme as an effort to avoid the obligation to pay tax debt.
This is made possible due to different opinion between DGT, curator, and judge indetermining preferential creditor.
Dispute on state properties, for example:
a. Procurement process;b. Documentation of ownership; andc. Insufficient maintenance.

III.3.13.3.2 Legal Assistance
DGT actively provides legal assistance for its employees, retired employees, or former employees whoare summoned by law enforcement officials as witnesses and experts related to their duties as DGTemployees. Additionally, DGT also monitors lawsuit process in which its employees, retired
employees, or former employees is a suspect. In general, DGT provide legal assistance in 2017 in its
capacity as a witness, both in the investigation and trial process.
III.3.13.3.3 Legal Opinion
DGT provides legal opinion to tax offices classified as follows:
1. Implementation of Tax Amnesty Law;
2. Tax collection and tax crimes investigation;
3. Preparation of memorandum of understanding, contracts and cooperation agreements between
DGT and other institutions;4. Legislative drafting of Law, Government Regulation in Lieu of Law, Government Regulation,
Minister of Finance Regulation, andDirector General of Taxes Regulation;
5. Mitigation of legal risk for tasks implementation, particularly related to strategic programs suchas the development of DGT information technology systems, urgent regulations preparation,plans for gijzeling and preliminary investigation, as well as procurement of goods and services.
III.3.13.3.4 Test Material
Overall, the handling of judicial review conducted by DGT in 2017 is explained in the following table.
Table 39: Dispute Material Tests 2017
Case Number
22/PER/III/22P/HUM/2017 dated
17 March 2017

27/PUU-XV/2017 dated 19 May
2017

63/PUU-XV/2017 dated 5
September 2017

Subject Matter of Request
Director Generalof Taxes Regulation Number 32 of 2012 as
amended by Number 47 of 2015 concerning Procedure for
Imposing Land and Building Tax on Mineral and Coal Mining
in Mining Sector
Article 32 paragraph (3a) of Law on General Provisions and Tax
Procedures concerning Requirements and Implementation of
Rights and Obligations of Taxpayer Representatives Stipulatedby Minister of Finance Regulation
Article 32 paragraph (3a) of Law on GeneralProvisions and Tax
Procedures concerningThe Authority of Minister of Finance toEstablish Requirements forTaxpayerRepresentatives

StatusWon

RevokedOngoing

Source: DGT, annual report 2017

III.3.14 Tax Collection
Law Number 19 of 2000 concerning Tax Collection With Distress Warrants definesTax Collection as aseries of measures intended to make a tax bearer settle his/its tax debts and tax collection fees by serving
him/it a reminder/a warning, implementing outright and automatic collection, notifying distresswarrants, proposing prevention, implementing confiscation, implementing hostage-taking and selling60

confiscated property. For more detailed collection enforcement mechanism, see figure 1 below.
A distress warrant shall have at its heading the words of "FOR THE SAKE OF JUSTICE ON THE
BASIS OF GOD THE ALMIGHTY" and shall have an equal executorial power and legal position as acourt ruling with a permanent legal force. Thus, tax collection with distress warrants shall be performed
without assistance fromany court ruling, even more, it could not be effected by any appeal. However, alawsuit could be regarded a legal effort only against the implementation of tax collection procedure andownership of property as regulated in the prevailing laws.
Figure 3: Tax Collection Enforcement

The basis for tax collection which contribute to the formation of tax debt, among others are: NTC,NTUA, NATUA, Decision on Objection (DO), Notice of Tax Correction (NTCR), Decision on Appeal(DA),and Decision on Review (DR) as well. In particular, NTCR is notice for correcting errors in writing,calculation, and or errors in the application of particular provisions of the tax laws found in a notice oftax assessment, NTC, DO, Decision on Deduction or Annulment of Administrative Penalties, Decisionon Deduction or Cancellation of Inaccurate Tax Assessment, or Decision on Pre-audit Refund of Tax
Overpayment, tax assessment notices issued by the Directorate General of Customs and Excise, as well
as tax assessment notices issued by Regional Taxes authorities (including official assessment notices ofLand and Building for Urban and Rural Area Tax which previously issued by DGT).
Thus, there are two key unique issuesregarding Law Number 19 of 2000. First, Tax Collection Law
applies to both Central and Regional collection of taxes. In the meantime, the implementation of the law
is performed by Central Taxes Authorities i.e. DGT and Directorate General of Customs and Excise –the implementation by Regional Taxes authorities is undergoing mostly on regional regulations
enactment phase.Second, the executor who is assigned to perform tax collection measures by such Law
is Tax Bailiff who acts as prosecutor of the Law.All Tax Bailiff’s tasks i.e.implementing a letter of
instruction for outright and automatic collection, notifying a distress warrant, implementing theconfiscation of the property of a tax bearer on the basis of a letter of instruction for the implementationof confiscation, and implementing hostage-taking on the basis of a letter of instruction for hostage
takingis supported by the authorization to enter and examine all rooms including opening cupboards,
drawers and other places in order to find the objects of confiscation at a business place of the tax bearer
and conduct confiscation at his domicile or at his residence, or at other places which may alleged asplaces where the objects of confiscation are kept.

61

III.3.15 International Taxation
III.3.15.1 Tax Treaties
Tax treaties provide tax benefits in the form of withholding tax exemptions for service fees as well as
in the form of reduced withholding tax rates on dividends, interest, royalties, and branch profits received
by resident of a country with which Indonesia signed a tax treaty. Such tax exemption on the service
fees is typically granted only if the foreign party earning the income from Indonesia does not have any
PE in Indonesia. Hence, to claim the reduced rates, foreign partyshall present its certificate of residence(CoR) to DGT through itsrelated Indonesian party. Failure submittingsuch document, itis not entitled totax benefit therein tax is withheld at a rate of 20%.
Regarding interest, dividends, and royalties, it is the beneficial owner acknowledged as the party
entitled to the tax treaty benefits.In order to benefit from tax treaties, such following criteria should be
met:
1. An individual whodoes not receive income as an agent or nominee;
2. An institution that is explicitly named in the tax treaty or one that has been agreed by theCompetent Authority in Indonesia and its treaty partner;
3. An offshore company that earns income through a custodian from share or bond transactions inIndonesian Stock Exchange (except interest and dividends), that is not an agent or nominee.
4. A company whose shares are listed on the stock exchange and traded regularly;
5. A bank; or
6. Any other company that meets specific requirements:
a. The company is established in the tax treaty partner country and the way
transactionsconductedare not merely to enjoy tax treaty benefits – business activities aremanaged by the company’s own management thatpossesses sufficient authority to carryout transactions;b. The company has employee(s);c. The company has activities or an active business;
d. Income derived from Indonesia is taxable in the recipient’s country;e. The company does not allocate more than 50% of its total income to fulfill its
obligationssuch as interest, royalty, or other payments to other parties.
In addition, the withholding tax rates applicable under tax treaties are summarized as below.

62

Table 40: Indonesia Tax Treaty Networks and Its Withholding Tax Rates
No

Country

Portfolio
15%
15%
15%
15%
15%
15%
15%
15%
15%
10%
10%
15%
20%
15%
15%
15%
15%
10%
15%
10%
7%
15%
15%
10%
10%
15%
10%
15%
15%
10%
10%
10%
10%
10%
15%
15%
15%
15%
20%
15%
10%
10%
15%
15%
10%
15%
10%
15%
15%
15%
10%
15%
15%
15%
10%
10%
20%
12%
15%
15%
10%
15%
15%
10%
15%
15%
20%

Dividends
Substantial Holdings
15%
10%
15%
10%
10%
10%
15%
15%
10%
10%
10%
10%
10%
15%
10%
10%
10%
5%
15%
10%
7%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
15%
15%
10%
15%
15%
10%
10%
10%
12.5%
15%
10%
10%
10%
10%
10%
15%
10%
15%
10%
10%
10%
10%
15%
12%
10%
10%
10%
10%
10%
10%
10%
15%
10%

Interest

Royalties

BranchProfit Tax
10%
10%
15%
12%
10%
10%
10%
15%
15%
10%
10%
12.5%
15%
15%
15%
10%
10%
5%
20%
15%
7%
12%
10%
20%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
20%
15%
10%
15%
20%
10%
10%
10%
12.5%
12.5%
20%
15%
10%
20%
10%
20%
10%
15%
15%
10%
10%
5%
20%
12%
10%
10%
5%
10%
10%
10%
10%
10%
10%

1
Algeria15%
15%
2
Armenia10%10%3Australia
10%15% / 10%
4Austria10%10%5Bangladesh
10%
10%
6
Belgium
10%10%
7Brunei15%
15%
8Bulgaria
10%
10%
9
Canada
10%
10%
10
China
10%
10%
11
Croatia10%10%
12Czech Republic
12.5%
12.5%
13
Denmark
10%
15%
14
Egypt
15%
15%
15
Finland10%
15% / 10%
16
France15%/10%
10%
17Germany
10%
10%
18
Hong Kong
10%
5%19
Hungary
15%
15%
20
India
10%
10%
21
Iran
10%
12%
22
Italy
10%
15% / 10%
23
Japan
10%
10%
24
Jordan10%
10%25
North Korea
10%
10%
26
South Korea
10%
15%
27
Kuwait
5%
20%
28
Laos
10%
10%
29
Luxembourg
10%
12.5%
30
Malaysia
10%
12.5%
31
Mexico10%
10%
32
Mongolia
10%10%33
Morocco10%10%34Netherlands
10%
10%
35
New Zealand
10%
15%
36
Norway10%
15% / 10%37
Pakistan15%
15%
38
Papua New Guinea
10%
10%
39
Philippines
15%
15%
40
Poland10%
15%
41
Portugal
10%
10%
42
Qatar
10%
5%
43
Romania
12.5%
15% / 12.5%
44
Russia15%
15%
45
Saudi Arabia1
46
Seychelles
10%
10%
47
Singapore
10%
15%
48
Slovakia
10%15% / 10%49
South Africa
10%
10%
50
Spain
10%
10%
51
Sri Lanka
15%
15%
52
Sudan
15%
10%
53
Surinam15%
15%
54
Sweden10%
15% / 10%55
Switzerland
10%
10%
56
Syria
10%
20 % / 15%
57
Taiwan10%
10%58
Thailand15%
15%
59
Tunisia12%15%60Turkey10%
10%61
Ukraine10%10%62United Arab Emirates
5%5%63
United Kingdom
10%15% / 10%64
United States
10%
10%
65
Uzbekistan
10%
10%
66
Venezuela
10%
20%
67
Vietnam15%
15%
68
Zimbabwe2
10%15%
Notes:
1. Limited to both countries airline companies
2. A protocol amending tax treaty has been signed, pending the ratification of the protocol and the exchange of ratification documents.

63III.3.15.2 Thin Capitalization
Based on Minister of Finance Regulation number 169 of 2015 (PMK-169), the ratio of debt to equity(DER) has been set to 4:1. Any borrowing cost on debt which exceeds this ratio will not be taxdeductible for corporate income tax purpose.The ratio is used to limit the amount of deductible
interest expense related to income tax calculation in order to meet the arm’s length principle.
Some sectors are exempted from this regulation, such as banks, financial institutions, insurance
and re-insurance companies, mining, oil and gas enterprises that are bound by production sharing
contract (PSC), Contract of Work or Coal Contract of Work which itself governs the DER. In case acontract does not mention any provision for the DER or the contract has come to its expiry, PMK169 will prevail and those exempted companies are subject to final income tax and infrastructurecompanies.
The implementation of PMK-169 is clarified under Director General of Taxes Regulation Number
25 of 2017 (PER-25) enacted on 28 November 2017. Not only does it provide details on thincapitalization implementation but also it includes the obligation to report DER calculation andprivate loan details as part of a corporate income tax return to DGT.
III.3.15.3 Controlled Foreign Company (CFC) Rules
Under Minister of Finance Regulation Number 107 of 2017 which revoked PMK-256/2008 andpartially Minister of Finance Decree Number 164 of 2002 concerning Foreign Tax Credit (FTC) for
dividend paid by a CFC, a dividend is deemed to be derived from a CFClocated in certain countries
ifone or more Indonesian resident taxpayers hold at least 50% of the paid-up capital in such foreigncompany. Such measure is established in order to curb tax avoidance by resident taxpayers throughoffshore investments. This condition applies if onlya CFC does not trade its share on the stock
exchange.
In case there is no dividend derived from offshore company, the resident taxpayer must calculate
and report the deemed dividend on its corporate tax return. Otherwise, the Ministry of Finance would
do so – the dividend is deemed to be derived either within 4 months following the deadline for filling
the tax return in the offshore country, or seven months after the offshore company’s tax year ends.
In brief, key aspects to such new regime encompasses detail definition of CFC which captures
not only a non-listed foreign entity but also captures indirect CFC, introduction of “deemed dividend”
concept, taxable dividend calculation, CFC income exemption, carried forward “deemed dividend”,
unrecognized CFC’s loss, no distinction either on CFC’s active or passive income, and FTC.
Particularly, FTC limitation is based on under following limits whichever is the lowest:
1. The effective tax treaty rate that is payable;
2. Foreign income tax;
3. An amount which is calculated based on the proportion of dividend received from a direct
CFC and the deemed dividend multiplied by the income tax due on such deemed dividend.
In order to claim the FTC, a taxpayer shall submit documents among others are financial
statements, copy of corporate income tax return, calculation of after-tax profit for past five years,
and a tax payment slip on actual dividend paid. Nevertheless, in case dividends are derived fromseveral countries, a per-country limitation applies.
III.3.15.4 Transfer Pricing
Detailed transfer pricing guidelines has been issued which in principle is in-line with The Organization
for Economic Co-operation and Development (OECD) guidelines i.e. Director General of Taxes
Regulation number 43 of 2010 and number 32 of 2011 concerning The Application of The Arm’s Length64Principle within Related Party Transactions. Subsequently, The Minister of Finance Regulation number
213 of 2016 has been enacted for the implementation of the three-tiered transfer pricing documentation
approach regarding master file, local file, and country-by-country report.
Based on the above-mentioned Minister of Finance Regulation, any taxpayer having related-party
transactions shall prepare the master file and the local file when it satisfies several conditions, among
others are, having preceding tax year gross revenue exceeding IDR 50 billion, having preceding tax year
tangible transactions exceeding IDR 20 billion, having preceding tax year intangible transactions
exceeding IDR 5 billion, and such related party transactions is conducted with the affiliated party locatedin lower tax rate jurisdiction at any amount.
III.3.15.5 Base Erosion and Profit Shifting (BEPS) Measures
BEPS is a tax avoidance strategy generally carried out by multinational companies by seeking loopholes
in tax regulation of a country. In order to minimize the impact of BEPS, tax authorities participating in
BEPS Project initiated by G20 and OECD have stated their readiness to implement BEPS action plans.
Regarding this issue, Indonesia has implemented Action 5, Action 6, Action 7, Action 13, Action 14,
and Action 15.
First, Forum in Harmful Tax Practices (FHTP) has assessed several regulations concerning tax
incentives and facilities in Indonesia and it has been stated that the applicable provisions are not harmful
and are outside the scope of FHTP area as the implementation of Action 5. Second, the adoption ofPreamble, Simplified Limitation on Benefit, and Principal Purpose Test in Multilateral Instrument(MLI) as well as improved provisions in Director General of Taxes Regulation number 10 of 2017
concerning Procedures for Implementation of Tax Treaty are actions to implement Action 6 and Action
7 respectively.
Third, the issuance of Transfer Pricing Documentation and Management of Country-by-Country
Reporting regulations under Minister of Finance Regulation number 213 of 2016 and Director Generalof Taxes Regulation Number 29 of 2017 respectively are implemented with regard to Action 13. Fourth,to address Action 14, Minister of Finance Regulation number 240 of 2014 concerning Mutual
Agreement Procedure (MAP) has been amended and it is prepared to be assessed in December 2018.
Lastly, Indonesia has submitted 33 tax treaties to be modified through MLI to address theimplementation of Action 15.
III.3.15.6 Mutual Agreement Procedure (MAP)
Statistically, as of 31 December 2016, the outstanding request for MAP was 49. The number thenincreased by 12 new requests during 2017 while during the year there were also 20 settlement of request
submitted, hence, the outstanding request as of 31 December 2017 remained 41, lower that previous
year. Such settlement of request is a sort of trade-off for taxpayers since MAP request can be submitted
simultaneously with objection and appeal process, however, if the appeal hearing is to be settled, thenthe MAP request is not be able to be submitted.
III.3.15.7 Advance Pricing Agreement (APA)
DGT implements both unilateral and bilateral APA which are valid for 3 years and 4 years upon
approval. Taxpayers who have transactions with affiliated parties can submit APA application within
6 months prior to the tax year in which APA will cover. As of 31 December 2017, the outstanding
request was 15 and 20 for bilateral and unilateral respectively. In comparison with the previous year,
there was a decrease by 1 unilateral request while bilateral number remained the same. Also, 3settlement of requests have been submitted during 2017.

65

III.3.15.8 Exchange of Information (EOI)
As of 2017, Indonesia has cooperated with 65 partner countries in implementing EOI. Currently,
Indonesia has Tax Information Exchange Agreement (TIEA) with 4 jurisdictions: Guernsey, Jersey,
Isle of Man, and Bermuda. Besides, Indonesia is one among the 116 signatories of Convention on
Mutual Administrative Assistance in Tax Matters (MAC).
During 2017, DGT has settled 196 EOI issues: 160 EOI on requests, 16 Spontaneous EOIs, and 20
Automatic EOIs on withholding tax for non-resident taxpayers. In addition, several attempts have been
conducted for the participation in Exchange of Financial Account Information (AEOI) and in
Automatic EOI for Country-by-Country Reporting (CbCR), among others are:
1. The Enactment of Law Number 9 of 2017 for the implementation of AEOI followed by
Minister of Finance Regulation Number 70 of 2017 and its amendments as the implementing
regulation of AEOI as well as Director General of Taxes Regulation Number 29 of 2017 as a
guidance for CbCR;
2. Signing international agreements carried out through Multilateral Competent Authority
Agreement (MCAA) for the exchange of CbCR on 26 January 2017 as well as BilateralCompetent Authority Agreement (BCAA) with Hong Kong on 16 June 2017;
3. Establishment of Common Transmission System (CTS) as a medium for transmitting AEOI
data; and
4. Ensuring data confidentiality and information security by improving data and information
security in DGT and complying with international Global Forum on Transparency andExchange of Information for Tax Purposes standards.
III.3.16 Tax Incentives
The meaning and purposes of granting tax incentives are primarily to promote the direct investment inIndonesia either foreign investment or domestic investment in certain business sectors or certain areas
which have the highest national priority covering the possibility of agreements with another country or
countries in the field of trade, investment and other areas as also mentioned earlier on BEPS Action Plan
5. Moreover, DGT has set one of its performance target 2018 to arrange a selective tax incentive
provision to support competitiveness of national industries.
III.3.16.1 Corporate Tax Benefit and Tax Allowances
Corporate taxpayers investing in certain approved industry sectors (stipulated by the government
and/or geographical areas may benefit form income tax benefit in the form of:
1. An additional reduction in net income up to 30% of the amount invested in tangible assets
allocated for six years;
2. Accelerated depreciation;
3. Extension of loss carry forward for up to 10 years; and4. A reduced 10% withholding tax rate on dividend paid to non-resident.
III.3.16.2 Tax Holiday
It is intended to new domestic/foreign investment in specific pioneer industries. Such regime grants
beneficial treatment to projects in high priority sectors such re upstream metals, crude oil refining andinfrastructure, basic organic chemicals, industrial machinery, agriculture, forestry and fishery-based
processing, telecommunication, information, communication, and economic infrastructure other thangovernment cooperation scheme i.e. a corporate income tax reduction from 10% to 100% for theminimum investment of IDR 1 trillion and a corporate tax reduction up to 50% for taxpayers intelecommunication, information, and communication sectors with a minimum investment value IDR 500
billion at least yet not more than IDR 1 trillion. Further, the period of tax holiday normally lasts from 566

years to 15 years, however, extension up to 20 years shall apply depending on the competitiveness andstrategic value of the industry – depends on discretion of The Ministry of Finance.
III.3.16.3 Upstream Oil and Gas Business Activities
In order to increase national oil and gas reserve, to promote investment climate, and to provide legal
certainty for the business, Government Regulation Number 27 of 2017 regulates tax incentive for
upstream oil and gas business activities, among others are:
1. exemption from import duty, VAT/LST, Article 22 Income Tax of import, and 100%
deduction on Land and Building Tax during exploration and exploitation phase;
2. exemption from income tax and VAT for cost-sharing charges and indirect expenditure ofhead office cost allocation;
3. Easing of non-cost recoverable into cost recoverable e.g. environment and local community
cost during exploitation phase, employee income tax paid as income tax incentive, and interest
recovery as incentive cost.
In addition, to enhance investment, Government Regulation Number 53 of 2017 targeted oil andgas upstream business activities with “gross split” PSC without mechanism for operating cost
recovery. Under such PSC regime, taxpayer can benefit from following tax incentives:
1. exemption from import duty, VAT/LST, Article 22 Income Tax of import, and 100%
deduction on Land and Building Tax during exploration and exploitation phase;
2. exemption for VAT for cost-sharing charges; and3. Fiscal loss compensation starts from subsequent tax year up to ten years.

67IV. Country Specific Fiscal Issues

IV.1 Medium Term Revenue Strategy (MTRS)
Indonesia needs to substantially increase its government revenue level in a sustainable manner tofinance additional expenditures that are critical for economic growth and development. With a ratio ofgeneral government tax revenue to GDP of just over 11 percent, Indonesia is the lowest among theGroup of Twenty (G20) countries and trails other emerging market economies. Empirical evidence
suggests that countries with a tax-to-GDP ratio of less than 15 percent tend to grow significantly more
slowly than countries beyond this tipping point because it impedes opportunities for productive
government spending. Therefore, adopting a medium-term approach to raising revenue will be criticalto achieving the revenue-level change that Indonesia needs.
The approach was developed for the G20 by the Platform for Collaboration on Tax and frames thetax system reform in a comprehensive and holistic framework of four interdependent components:
1. Building broad-based consensus in the country for medium-term revenue goals to financepublic expenditures.
2. Designing a comprehensive tax system reform covering policy, administration, and the tax
legal framework to achieve these goals.
3. Committing to steady and sustained political support (government-led and whole-ofgovernment approach) of implementation of the strategy over multiple years.
4. Securing adequate resourcing—domestically and from capacity development partners anddonors—to support implementation of the MTRS.
To achieve the MTRS’s revenue target, tax policy, tax administration, and legal measures are needed.
These reforms will work in tandem, and there will be important interactions between them. For example,
improvements in value-added tax (VAT) compliance (tax administration) will be supported by a fasterrefund system, elimination of VAT exemptions, and simplification of the law (tax policy). Good-quality
legal tax provisions—comprising tax laws, regulations, decrees, and circulars—are essential to provide
certainty to taxpayers and to minimize the costs of compliance. The next two sections develop a set ofconcrete reforms in the areas of tax policy and tax administration. The revenue implications of thesemeasures are quantified using historical data, international comparative evidence, or empiricallyvalidated model simulations—although some of these calculations might need further refinement when
the government’s own MTRS is formulated.
IV.2 Village Fund (Dana Desa)
Village Act has been assessed and it encourages village to be priority in National Development. On theother hand, by implementing Village Act, it has become trigger to improve the quality of welfare invillage. Villages have had authority and source of fund to explore some potency in order to increasevalue added in village. Every year, Ministry of Finance has budgeted Village Fund gradually. In 2015,
Village Fund has been budgeted IDR 20.7 trillion. In 2016, the sum of village fund has become IDR
46.98 trillion. In 2017, Ministry of Finance has approved IDR 60 trillion village fund.
It is still needed some improvements in implementing Village Fund. Some Subordinate regulations,
Human Resource in Village and Control System are some instruments that influence quality of village
fund utilizing. The most importance thing in implementing Village Fund is how central government
provides Technical Assistant for village apparatus. It is related with village apparatus to manage fundwell and utilize it appropriately. It will not impossible that village could have its own corporation like“Village Owned Enterprises”. Moreover, by implementing Village fund, Indonesia could reduce
economy inequality between rural and urban area gradually.

68

IV.3 E-Commerce Taxation
Digital economy has been the most-discussed issue in the taxation field for years. Several countries havetaken various approaches regarding such issue. Firstly, EU Commission Report on its assessment on
indirect tax regime has shown proof that voluntary compliance and cooperation among tax jurisdictions
and the business could be regarded as most feasible approach since 2002. Also, The United States hastaken serious approach towards digitalization and tax as depicted in the form of Foreign Account Tax
Compliance Act (FATCA) to combat tax avoidance and tax evasion conducted through offshore
financial center involvement. Indonesia has agreed to take participate in FATCA since financial
technology-related issue should be grasp by all tax authorities as one of measures for taxing digitaltransactions – Indonesia has already been categorized as a so-called “qualified country” to implement
AEOI.
Previously in 2013, DGT released a circular letter explaining taxation perspective on e-commerce
which explains that classified ads, market places, retail online, and daily deals shall be interpreted into
conventional transaction models; hence, tax can be imposed accordingly. Meanwhile, it is not an easytask for DGT to monitor as well as to control e-commerce transactions so that tax compliance isrelatively low. On one hand, e-commerce has been growing in a rapid pace along with its complexities.
Several issues such as cross border transaction (territorial-related issue), new model transaction, newmodels of payment, digital transaction record, and other digital innovation as well have become attention
to pay to, especially tax authority.
Furthermore, although a lot of developed countries as well as developing countries have taken either
measures or interim-measures, Indonesia is seemingly in the stance of “waiting for the best measure”
which could harmonize with Indonesian tax system” while performing internal further analysis
concerning digital economy in the form of enactment of The President Regulation Number 74 of 2017
concerning e-Commerce Road Map, dated on 21 July 2017 to boost economic potential while providing
the relevant regulation platform for imposing the tax along the way.
In terms of step that has been taken by Indonesia was collecting tax from Google as one of world
biggest e-commerce entity in 2017 for their corresponding transaction in accordance with Indonesiantax rules. Google paid its tax owed to Indonesia since 2015 making Indonesia as the fourth country after
Britain. India and Australia that has managed Google to pay tax. Google has been regarded to havepermanent establishment in Indonesia by DGT, therefore Google would continue to pay income tax aswell as VAT to Indonesia. Indonesia has started to take measures to other digital multinational giants
since then.

69

V. Conclusion: Where We Stand and Where We Go?

V.1 Global Environment
In 2017, Indonesia’s Macroeconomic was stable. Bank of Indonesia has implemented some policies tokeep Economic Growth, Inflation Rate, Currency Rate and Interest Rate smoothly. Monetary Policy also
has been formulated to reduce impacts from international economic pressure. Indonesia has obtainedsome lessons from Asia Financial Crisis in 2017 and Global Financial Crisis in 2008. This crisis insists
Indonesia to care with some bad impacts and carry out preventive steps in the future. Therefore,
Financial System Stability Committee (KSSK) has important role to keep Indonesia’s economy to run
on the right track.
Indonesia also had some challenges in International Trade in 2017. Indonesia Current Account in2017 was still negative. It was caused oil import was still bigger that oil export so that it burdens
Indonesia’s Balance on Payment. On the other hand, Primary Income also recorded negative value.
Besides, Indonesia also recorded positive trend in Investment Account in 2017. Portfolio investment
still contributed the biggest portion from total investment. One of factors that caused the value ofPortfolio investment increased significantly is Indonesia Government Bond got Investment Grade fromInternational Credit Rating. The appraisal from international credit rating certainly makes investor moreinteresting to buy Indonesia Government Bond.
In the future, Indonesia will face global economy pressure. The trade war between China and UnitedState absolutely is going to bring impact in Indonesia International Trade. China still becomes the main
destination for Indonesia’s export. By this condition, it will make distortion in Indonesia supply chain
especially for commodities that exported to China. For not being China oriented export, Indonesia
should diversify other export market so that Indonesia’s export volume will not be influenced bygeopolitical tension. Instead of, Indonesia also has chance to increase the quota of export if Indonesia
could find new markets.
Indonesia is net oil importer country because the value of oil import is higher than oil export. It isseemed from the value of oil import that still becomes burden for Indonesia Balance on Payment. Thiscertainly demands Indonesia government to formulate some policies. For short term, increasing thevolume of oil lifting per day is a solution to increase oil export but it needs big investment to launch
new oil exploration projects. On the other side, restricting the consumption of oil in society will be a
trigger in social problem if government is not careful in implementing policy.
One thing that should be government’s attention is US interest rate policy. Lately, US often increase
the interest rate that cause capital outflows from emerging countries including Indonesia. By increasingof US interest rate, it makes Indonesia Currency (IDR) depreciated. In 2018, Bank Indonesia has carriedout market intervention to keep Indonesia Currency (IDR). One of intervention steps that carried out byBank Indonesia is increasing the Bank Indonesia interest rate so that the IDR pressure is not too
significant. Bank Indonesia also has acted to keep trade-off between IDR and interest in order to notmake distortion in Real Sector in Indonesia. In 2019, the possibility in US interest rate might continue.
Therefore, Indonesia government should have provided anticipation steps to tackle the Fed Rate higher.
V.2 Fiscal Policy
In recent years, state revenue of Indonesia heavily relies on taxes of non-oil and gas sector, hence,
government still put high effort on MTRS to boost tax revenue – such approach had not been done
before 2016. However, there are several important issues related to MTRS. First, MTRS should
designate a proper tax policy in accordance with long-term objectives. Second, MTRS should also
generate stakeholder-friendly tax administration system so that vision and mission of DGT as the
responsible tax authority in accordance with short-term objectives.

70

Meanwhile, from the state expenditure perspective, the main focus is on the quality of the expenditurei.e. expenditure on education, infrastructure, and health. First, government has launched several subsidy
in education, among others are: Kartu Indonesia Pintar (KIP) which has been launched in 2014 tofinance less fortunate yet smart high school students and below, BIDIKMISI which is intended to finance
university undergraduate candidates who is less fortunate but possesses high-school outstanding passing
grades, as well as Indonesia Endowment Scholarship (LPDP) for students who would like to pursue
higher education in Indonesia universities or abroad. Overall, those three types of scholarship areprovided for roughly 40% people who live under poverty line in accordance with Public Finance Act
that regulates the total expenditure for education is accounted for 20% of the total state budget.
Second, infrastructures are massively built, particularly; new highway, airports, ports, and bridges
construction projects are concentrated in the east part of Indonesia area to ease access for the population.
The budget for infrastructure comprises roughly 25% of total state budget. Third, Kartu Indonesia Sehat(KIS) was launched in 2015 is intended to guarantee that under-poverty-line society have sufficient
access to health insurance – the government allocates roughly 5% of the total state budget for such healthexpenditure.
Moreover, Dana Desa as a form of so-called Village Fund has been established in 2015. As alreadybeen previously discussed, the increasing amount of Dana Desa saw that the objective of Village Fundis merely to increase economic potential within villages as well as to enhance standard of living ofvillagers. Besides, Village Fund may also be used as a source of funding not only infrastructure but also
for village empowerment under the administration of the responsible village authority. In principle, such
expenditures are allocated in order to lower poverty rate and inequality between urban sector and ruralsector.
Further, due to the fact that government of Indonesia is still in the stance of budget deficit, theissuance of government bond is regarded as an instrument to finance such deficit with the condition thatthe government shall implement a budget discipline by ruling budget expenditure by not more than 3%of GDP and maintaining the level of the debt to be less than 60% of GDP.
Nevertheless, fiscal policy should be practically supported by stable macroeconomics condition, forinstance, fiscal authority should consider economic indicators such as GDP growth, inflation rate, oillifting, currency rate, employment rate, and so forth in the process of budget planning to mitigate asevere budget deficit. Thus, endurance, credibility, and sustainability of the ideal state budget design
will seem to be feasible.
V.3 Challenge on Tax Administration
Based on Director General of Taxes Decree Number 95 of 2015, Five DGT Policy Objectives have been
set as follows:
1. Year 2015:Guidance Year of Taxpayer’s Compliance;
2. Year 2016: Law Enforcement;
3. Year 2017: Reconciliation;
4. Year 2018: Synergy With Government Institutions,Agency, Association, and other parties;
5. Year 2019:Self-Reliance of State Budget.
In order to meet its policy objectives, DGT Strategic Map consists of 17 strategic objectives with theframework based upon the perspective of learning and growth, internal processes, customers, andstakeholders. By having strong basic foundations as competitive human capital, conducive organization,
reliable management of information system, and optimal management of budget,DGT would be able toaddress its internal processes strategies which includes strategies in the function of services anddissemination, supervision, and law enforcement supported by the improvement in data reliability andmaximum quality control. Consequently, on the customers ‘perspective, public service fulfilment aswell as high level of tax compliance would be achieved, moreover, such achievements would then71contribute tothe optimal tax revenue – the ultimate goal aimed by the government and, most importantly,
the public.
On one hand, DGT has done several historical accomplishment. First, Tax Amnesty Program which
was participated by 973,426 taxpayers has contributed to a total of IDR 4,884.26 trillion of assets
declared. Besides,Voluntary Asset Disclosure – Final Tax Rate policy has been enacted as a result ofTax Amnesty success. On the other hand, in addressing “Transparency in Building The Nation” issue,
Indonesia along with other G20 countries have stated the commitment to adhere international taxationagreements as well to implement AEOI as stated in Common ReportingStandard (CRS) starting in 2017.
Such initiative serves as one of global community’s endeavors to combat tax avoidance and tax evasion
resulting fromlimited access to financial information ofrespective countries which then called as the endof the banking secrecy for tax purposes.
Thus, having been effortlessly implementing Guidance Year of Taxpayer Compliance, Law
Enforcement, Reconciliation, and Synergy with other parties since 2015, DGT is now seeking to meetitsultimate policy objective: Self-Reliance of State Budget.Any effort for achieving optimal tax revenue
such as increasing tax ratio, broadening tax base, introducing new taxese.g. inheritance, gift, and net

72References
Bank of Indonesia (2011), the Indonesia Economy Entering a New Era, 2011, Institute of Southeast
Asian Studies, Singapore.
_____ (2018), 2017 Economic Report on Indonesia, March 2018, Bank of Indonesia, Jakarta.
Directorate General of Taxes (2018), Annual Report 2017, Directorate General of Taxes, Jakarta.
Economist Intelligence Unit (2017), Country Report Indonesia, Economist Intelligence Unit.
Indonesia Statistics (2018), Economic and Financial Data, Retrieved from https://bps.go.id
International Monetary Fund (2018), RealizingIndonesia’s Potential Economy2018, International
Monetary Fund Library.
Lumbatoruan, Sophar (2006),AkuntansiPajakCetakanke-delapan, PT GramediaWidiasarana Indonesia,
Jakarta.
Price Waterhouse Coopers Indonesia (2018), Indonesian Pocket Tax Book 2018, PT Prima
WahanaCaraka, Jakarta.
Ricklefs, M.C. (2008), A History of Modern Indonesia since C.1200 fourth edition, Palgrave Macmillan,
New York.
The Government of the Republic of Indonesia, Law No. 28 of 2007 concerning General Tax Provisions
and Procedures.
The Government of the Republic of Indonesia (2009), Law No. 28 of 2009 concerning Regional Tax
and Retribution.
The Government of the Republic of Indonesia (2008), Law No. 36 of 2008 concerning Income Tax.
The Government of the Republic of Indonesia (2009), Law No. 42 of 2009 concerning Value Added Tax
and Luxury-Goods Sales Tax.
The Government of the Republic of Indonesia (1985), Law No. 13 of 1985 concerning Stamp Duty.
The Government of the Republic of Indonesia (2000), Law No. 19 of 2000 concerning Tax Collection
with Distress Warrant.
The Ministry of Finance of Indonesia (2018), BukuPintar Dana Desa, Retrieved fromhttps://www.kemenkeu.go.id/media/6749/buku-pintar-dana-desa_____ (2018), Proses Kembalike Negara Kesatuan, Retrieved fromhttp://www.artikelsiana.com/2014/09/proses kembalikenegarakesatuan_____ (2018), SejarahNama Indonesia, Retrieved from https://id.wikipedia.org/wiki/Sejarah namaIndonesia_____(2018, Balance of Payment, Retrieved from https://www.investopedia.com/terms/b/bop_____ (2018), Financial Data, Retrieved from http://www.ojk.go.id/id/, the official homepage ofIndonesia Financial Service Authority_____ (2018), APBN 2017, retrieved from https://www.kemenkeu.go.id/apbn 2017_____ (2018), Indonesia, Retrieved from https://id.wikipedia.org/wiki/Indonesia_____ (2018), Economy of Indonesia, Retrieved from https://www.indonesiainvestments.com/news/news columns/economy of indonesia_____ (2018), Export Data, Retrieved from http://setkab.go.id/en/indonesias_____ (2018), Indonesia Export Import, Retrieved from http://www.kemendag.go.id/id/economic
profile/economic indicators/indonesia export import73