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JAKARTA - Indonesia plans to cut its corporate tax rate starting next year to spur investment and growth, said Aburizal Bakrie, the coordinating minister for economic affairs. The tax rate will be cut to 25 percent from 30 percent over a period of five years, starting with a one percentage-point reduction in 2005, Bakrie said Tuesday.
"This has been put on the tax reform draft to be presented to Parliament," Bakrie said in Vientiane, where he was attending a meeting of the Association of Southeast Asian Nations. The tax cuts are among policies being introduced by Indonesia's new president, Susilo Bambang Yudhoyono, to create jobs, Bakrie said. Forty million Indonesians have no steady source of work, the World Bank estimates. Indonesia also needs to stop declines in foreign investment.
The government said on Nov. 10 that the value of approved foreign direct investment for the first 10 months of the year fell 11 percent from a year earlier. Lower taxes could help by reducing the tax differential with regional competitors, said Stephanie Lee, a fund manager at Aberdeen Asset Management in Singapore.
A tax cut would make the country "more competitive with the rest of the region, given the reason that Indonesian taxes are pretty high compared with Singapore and Hong Kong, for example," Lee said. The corporate tax rate in Singapore is 20 percent while in Hong Kong it is 17.5 percent.
The government is reviewing labor rules that stipulate minimum wages for workers and that require employers to pay severance even to those fired for misconduct, Bakrie said. He favors freezing minimum wage levels. "As a policy I would like to see more jobs being created rather than paying more to those having jobs," Bakrie said. "The minimum wage is there and will stay. I don't want to increase it."
Indonesia also plans to reconsider laws allowing administrations in districts and provinces to impose levies on companies. Such regulations increase business costs and discourage new investment, Bakrie said. The government may fund as much as 40 percent of the $72 billion to $75 billion needed to build roads, ports, power projects and telecommunications infrastructure in the next five years. The rest will come from local and overseas investors, Bakrie said.
Investors may be invited to bid for infrastructure projects such as those for building toll roads and power plants as early as January. The call may coincide with an investment seminar in Jakarta, Bakrie said. Projects such as roads in rural areas will be carried out by the government, he said.
The administration plans to borrow from domestic banks and use savings in government-run pension funds to pay for its share of the planned investments in infrastructure, Bakrie said. "We have called banks and they say they have $20 billion to spend," he said. "Government pension funds have more than $4 billion."
The administration also plans to start a $1 billion infrastructure fund and will contribute a 10th of it, he said. The government is counting on increased investments to help accelerate economic growth to 7.2 percent by 2009, from an estimated 4.8 percent this year.
"If you cut the red tape, the private sector will move," Bakrie said. The local currency will probably stabilize in the next two years, Bakrie said. A trading range of between 8,500 and 9,000 rupiah to the dollar would be "appropriate," he said. "A weak dollar is bad for Indonesian exporters and a strong dollar is not good for companies who have to repay their debt," he said. The rupiah has fallen about 6.5 percent against the dollar this year.
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