Income Tax on Bond Interest Cut to 15%

The Jakarta Globe, Yohanes Obor & Muhamad Al Azhari, February 12, 2009 

The tax service said in news release on Monday that it had reduced the tax payable on bond interest to 15 percent from the current 20 percent for domestic taxpayers and companies, effective Jan. 1, while keeping the 20 percent rate on bond interest paid to non-resident taxpayers, other than non-resident companies. 

Also effective Jan. 1, income tax on dividends would be charged at 10 percent, from 20 percent previously, and at 2.5 percent on derivatives transactions in the form of futures contracts, which had previously been tax exempt. 

Darmin Nasution, the director general of taxation, had said earlier that the tax reductions were aimed at easing the burden on companies amid the ongoing global slump. 

On the downside, however, the tax office also said in the release that the interest on bonds purchased by licensed mutual funds would be taxed at 5 percent between 2011 and 2013, and at 15 percent starting 2004. 

Mutual funds, which are currently exempt from tax, will continue to be exempt through 2010. 

Referring to the reduction in tax on bond interest paid to taxpayers and companies, Eric Sugandi, an economist at Standard Chartered Bank, commented: “This is a good thing as the reduction in the tax on bond interest will encourage retail investors to put their money in government bonds.” 

He said the government's first retail Islamic bond, or sukuk , issued on Jan. 30, drew a positive response from investors. 

In lieu of interest, which is forbidden by the rules of Islamic finance, the government has set the annual return on the retail sukuk at 12 percent, higher than bank deposit interest rates of about 10 percent offered to preferred customers. 

The proceeds from the sukuk, the government has said, would be used to help cover the 2009 budget deficit, which is projected to rise to 2.5 percent of gross domestic product. 

“I think the government is not going to try to increase tax receipts further to cover the budget deficit as the available financing is already sufficient. It has received a lot of support from international financing agencies, such as the World Bank and Asian Development Bank, as well as loans from a number of countries,” Eric said. 

Meanwhile, Michael Tjoajadi, a director of PT Schroders Investment Indonesia, said he cautiously welcomed the new ruling imposing income taxes on bond interest earned by mutual funds, as it introduced no abrupt changes. 

“As the tax will only gradually be imposed on mutual funds, investors will have time to adjust to the new rules,” he said, noting that those marketing the funds would no longer be able to rely on tax advantages as selling points.