Outline Recent Fiscal Development Indonesia s Fiscal Policies Fiscal Policy on Shariah Business Taxation on Shariah business Government Support Strategic Plan Conclusion Conclusion 2
Indonesia s Fiscal Policy 4 pillars of development 1. PRO GROWTH: encourage quality economic growth, inclusive, and equitable 2. PRO-JOB: create employment opportunities and reduce unemployment level to 6.4-6.6 % 3. PRO-POOR: target to reduce poverty rate to 10.5-11.0 percent. 4. PRO ENVIRONMENT: support natural and environmental protection National Development Priorities 1. Bureaucratic Reform and Governance 7. Investment and Business Climate 2. Education 8. Energy 3. Health 9. Environment and Disaster Management 4. Poverty 10. Regions, Lead, Outermost, and Post-Conflict 5. Food Security 11. Culture, Creativity, and Technological 6. Infrastructure Innovation 3
Reaping the Rewards of Proactive Fiscal Policy Consistent Fiscal Sustainability 2010 Surplus/ (Deficit) (% of GDP) Strong Fiscal Position vs. Peers 2010 Surplus/ (Deficit) (% of GDP) (0.1%) (0.4) (0.6) (0.9%) (1.3%) (1.6%) (0.6%) Avg. = (1.1%) (2.1%) 2006 2007 2008 2009 2010 2011 Revised Budget Source: Ministry of Finance Peru, BBB- (2.1) (2.3) (2.4) (2.6) (2.9) (3.1) (3.2) Indonesia, BB+ Brazil, BBB- Vietnam, BB- Colombia, BBB- Philippines, BB Mexico, BBB BBB Median Source: Ministry of Finance and S&P BB Median (3.9) Turkey, BB (5.3) S. Africa, BBB+ (8.3) India, BBB- Unemployment Continues to Outperform Developed Market Counterparts 4.1% 4.6% 6.8% 7.0% 7.7% 8.0% China Japan Indonesia Germany UK Italy 14.3% 15.8% 12.2% 9.1% 9.7% US France Portugal Ireland Greece 21.0% Spain State Budget is Directed to Reduce the Poverty Level Rp tn 120 100 80 60 40 20 0 40.7 Social Expenditure (LHS) People living below poverty line (RHS) 49.8 57.7 73.8 68.6 #USD9.1bn 81.8 2006 2007 2008 2009 2010 2011 Revised Budget 19% 18% 17% 16% 15% 14% 13% 12% 11% Source: Ministry of Finance as of February 2011 Source: Ministry of Finance Note: USD / Rp. exchange rate of 8,995, the BI middle exchange rate as of September 26, 2011. US dollar values are for convenience only 4
Renewed Focus on Capital Expenditures Targeted Infrastructure Spending through Capital Expenditure Helps Lower the Unemployment Rate Rp tn 160 140 120 100 80 60 40 20 0 55.0 Capital expenditure (LHS) Unemployment (RHS) 64.3 72.7 75.9 80.3 USD15.7b n 141.0 2006 2007 2008 2009 2010 2011 Budget 11% 10% 9% 8% 7% 6% Source: Ministry of Finance Note: USD / Rp. exchange rate of 8,995, the BI middle exchange rate as of September 26, 2011. US dollar values are for convenience only Increased Allocation for Capital Expenditures in the Annual Budget as Subsidies Decrease 2005 Budget 2011 Budget Source: Ministry of Finance Others 10% Social Exp 7% Subsidy 33% Personnel Exp 15% Interest Payment 18% Capital Exp 9% Material Exp 8% Subsidy 26% Social Exp 9% Interest Payment 12% Others 1% Personnel Exp 20% Material Exp 16% Capital Exp 16% 5
Debt Management Strategy 2010-2014 Fulfilling financing need through issuance of government securities (which SUKUK IS one of them) and obtain government loans/ project financing; Optimizing debt portfolio structures to support fiscal sustainability; Developing debt instruments to obtain flexibility in choosing more cost-efficient and minimal risk instruments; Obtaining foreign loans to finance priority projects that provide favorable terms and conditions; Optimizing foreign loans to finance project priority and high quality project; Improving coordination with the monetary authorities and capital market authorities, to encourage financial deepening; Improving coordination and communication to enhance the efficiency of loans management and sovereign credit rating improvement Source: Ministry of Finance 6
Sustainable Fiscal Management Fiscal Deficit (% of GDP) 0.0-0.5 2005 2006 2007 2008 2009 2010 2011 2012-1.0-1.5-2.0-2.5 8-year fiscal deficit average= -1.1% Debt to GDP Ratio Has Been Sharply Declining Since Crisis Period (Trillion 9,000 IDR) 100% 8,000 85% 89% 90% 7,000 6,000 5,000 4,000 3,000 2,000 1,000 77% 67% 61% 57% 47% 39% 35% 33% 28% 26.1% 24.9% 23.8% 80% 70% 60% 50% 40% 30% 20% 10% Source: FPO 0 1999 2001 2003 2005 2007 2009 2011-Revised budget GDP Outstanding Debt Debt to GDP Ratio (RHS) 0% 7
Debt To GDP Ratio: A Comparison 120 110.85 100 80 65.71 68.20 79.78 60 52.79 40 36.31 38.33 42.80 44.12 20 22.47 25 0 Peru Indonesia Colombia Panama Tunisia Croatia Uruguay Brazil India Hungary Portugal Debt to GDP ratio of Indonesia is better than some BBB- Countries rating. Source: IMF, OECD, Ministry of Finance 8
2. Fiscal Policy Support for Sharia Business Activities
Background Before 2009/2010 Different tax treatment between conventional and sharia business practices (income tax and VAT) 1. Income Tax (in the old Income Tax Act before 2009): Income from sharia business enterprise has not been confirmed as the object of tax. Income tax on sharia based business is not clearly regulated, causing difficulty in applying sharia principles. 2. VAT (in the old VAT Act before 2010): Financial services as transaction on conventional was recognized as non taxable object, but on sharia mechanism was object to tax. 10
After 2009/2010 1. Amendment income tax Act No. 36/2008, (implemented since 2009 ) 2. Amendment VAT Act No. 42/2009, (implemented since 2010 ) Transition Tax borne by government for VAT transactions (caused by unequal tax treatment) 11
Fiscal Policy Related with Income Tax Amendment Income Tax Laws (Article 31D): Defining Income tax treatment for business activities based on Shariah, which further detailed on Government Regulation (PP) No: 25/2009. Income from activities based on Sharia defined as object to tax, this includes: a. Income; b. Costs; c. Tax cuts or tax collection equal treatment legal certainty 12
The equality between conventional and sharia financing is affirmed by Finance Minister Regulation : 1. Finance Minister Regulation No. 137/PMK.03/2011 about income tax for financing based on sharia principle leasing based on Islamic principles ijarah will be imposed with tax the same as operating lease ijarah muntahiyah bittamlik will be imposed with tax the same as financial lease profit from factoring wakalah bil ujrah and consumer financing based on murahabah, salam, and istishna will be imposed with income tax according to the regulation of income tax on interest rate, the income earned from credit card operations and other financing based on Islamic principles subject to income tax in accordance with the provisions of the Law of Income Tax 13
2. Finance Minister Regulation No. 136/PMK.03/2011 about income tax for business operations of Islamic banking The regulation states that income tax is imposed to income in the form of bonus, profit sharing, and profit margin in accordance with income tax on interest. Other income tax is imposed to transaction customers as the debtors between sharia banks and From these two regulations: The amount of tax for sharia financing and sharia banking refers to the regulation of income tax. If there is a transfer of property or lease property that must be done to meet Islamic principles, it is not included in the definition of property as in the Law of Income Tax 14
Fiscal Policy Related with VAT Amendment VAT Laws No: 42/2009 Confirms VAT treatment of transactions based on Sharia. On article 1A (1) letter h on VAT Act, for goods that delivery on Islamic financial transaction scheme confirm like conventional financial transaction (directly from seller to buyer), thus recognized non tax payable. Explanation of Article 4A (3) letter d, affirm Islamic financial services is non object to VAT, including other Islamic financing services such as financial lease, factoring, credit card, financing, lending and underwriting. equal treatment legal certainty 15
Fiscal Facilities tax is Borne by the Government (DTP) 2010 for VAT transactions on Sharia Murabahah Before 2010 (before the enactment of amendment VAT Laws), those sharia transaction (murabahah transaction) was being to tax. For 2010, those tax billing (define from tax assessment letter), was borne by government. Government represent on Revised Budget 2010 for VAT fiscal stimulus tax paid by government for murabahah transactions 16
Strategic Plan 2010-2014
Islamic Financial Market Development of Indonesia 1980 1994 2000 2002 2004 2007 Islamic banking 1 st Islamic Bank Bank Muamalat Ind 1 st Islamic Branch Bank IFI Syh 2 nd Islamic Bank Bank Syh Mandiri Office Channeling Islamic Banking Act (2009) Takaful 1 st Takaful Company Asuransi Takaful Keluarga 1 st Takaful Branch Assi Great Eastern 1 st Islamic Re-ins ReINDO Financial Markets 1 st Shariah Fund PT. Danareksa Islamic Money Market (IMA Certificate) Jakarta Islamic Index Islamic Capital Market ICM Master Plan (2005) Sukuk 1 st Corporate Sukuk Indosat (Mudharabah) - 2003 Sukuk Guidelines (2006) Sukuk Act (2008) Issue State SUKUK 1992 1997 1999 2001 2003 2006 2008
Development of Regulatory Framework to Support Development of Capital Market and Non Bank Financial Industry, Based on Sharia Principles Capital Market Sector Issuance of Sharia securities and the criteria of Sharia Securities, has provided the basis for developing capital market activities based on Sharia principles. *( Guidance National Sharia Board Ref.#: 80/DSN-MUI/III/2011) Issuance of regulations for implementing and managing of Sharia principles, related to monitoring compliance with Sharia principles Insurance Sector Issuance The Application of Basic Principles of Insurance Business Operation and Reinsurance Business With Sharia principles. (MOF Regulation No. 11/PMK.010/2011) Publishing PMK is the first step that needs to be followed up with the development of regulations with more comprehensive. Financing Sector Issuance of regulatory frameworks associated with financing products based on Sharia principles have provided the basis for the development of financing activities based on Sharia on finance companies. 19
Sharia-based Capital Market and non bank financial institution Products are Growing significantly Progress for Total Value of Sukuk Emission and Total Number of Sukuk Issuance 2005-2011 Progress for Total Net Asset Value (NAV), and Total Number of Syaria Mutual Funds 2005-2011 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 28 Feb 2011 Total Value of Sukuk Emission (Rp Billion) Total Number of Sukuk Issuance 50 45 40 35 30 25 20 15 10 5 0 6000 5000 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 28 Feb 2011 Total NAB (Rp Billion) Total Number of Syariah Mutual Funds 60 50 40 30 20 10 0 Progress for Key Indicators of Insurance and Reinsurance Company Based on Syaria Principles 2005-2009 3000 2500 2000 1500 1000 500 Source: Ministry of Finance 0 2005 2006 2007 2008 2009 Gross Premium Claim Investment Assets 20
Composition of Government Securities Source: Ministry of Finance Item Realization on August 31, 2011 (IDR) Government Securities 143.073.910 Government Bond Securities 122.592.500 Government Islamic Securities 20.481.410 21
Strategic Plan Promoting Equality of Sharia Financial Products with Conventional Products. a. Product creation process b. Product issuance procedures c. Publishing products liability d. Taxation treatment Developing framework regulatory to support market development capital and non-bank financial industry based on Sharia principles. a. Capital market b. Insurance c. Financing, insurance, and mortgage d. Pension fund Strategic Plan: Islamic Capital Market and Islamic Non Bank Financial Institutions 2010-2014 Developing capital market products and non-bank financial services, based on Sharia principles. a. Increase the quantity of products b. New product innovation based as needed c. Improving product competitiveness Enhancing Human Resource Development in the Capital Market and non-bank financial industry based on Sharia principles. a. Improving quantity and quality b. Education and intensive socialization c. Preparation of educational infrastructure Source: Ministry of Finance 22
Conclusion 1. The great number of Indonesian population with moslem as majority and supported by Strong Economic fundamentals as reflected in the maintained of inflation rate, the exchange rate was stable relatively, sustainable growth and prudent fiscal policy made Indonesia are very potential for the development of Islamic financial market. 2. Government have strong commitment for that development Regulatory framework systematic regulatory framework designed to support development of capital market and non bank financial industry, based on sharia principles. Fiscal Policy giving EQUAL TREATMENT to the business of Sharia and conventional, and provide LEGAL CERTAINTY on the rules of taxation. 23
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