Tax Deductions to Boost Human Capital Investment

KELVIN HIANUSA

Enny Sri Hartati

The Institute for Management Development’s 2018 survey has ranked Indonesian workers fourth in ASEAN in terms of competitiveness. This is not only alarming, but is also a serious threat, because the integrated ASEAN Economic Community (MEA) applies not only to free trade, but also the labor market.

If this is not improved immediately, Singapore, Malaysia and Thailand could invade the Indonesian labor market. The causes include low education and a mismatch between education and industry needs.

KOMPAS/WAWAN H PRABOWO

Female workers produce shoes in a factory in Cikupa, Tangerang, Banten, on April 30, 2019. The factory employs as many as 150,000 people.

In fact, the quality of workers determines global productivity and competitiveness. Evidently, Indonesian ranked 45th in the World Economic Forum’s (WEF) 2018 Global Competitiveness Report. Indonesia\'s ranked 68th in capacity for innovation, particularly in research and development.

The next challenge for Indonesia is to be ready to enter the Industry 4.0 era. This requires not only preparing a skilled workforce, but also the widespread adoption and mastery of technology. The problem is that, despite the constitutional mandate to spend 20 percent of the national budget on education, almost 60 percent of the Indonesian workforce is composed of junior high school and elementary school graduates.

The government has tried to find a solution by involving businesses through the so-called super deductible tax, with the government expanding the criteria for tax incentives (deductions). Under Government Regulation No. 45/2019, the government offers the incentive of reducing taxable incomes (PKP) for businesses that contribute to research, innovation and vocational. The businesses can deduct the costs incurred for these activities from their taxable incomes, which will enable them to reduce the amount of income tax they pay.

First, the government will reduce taxable incomes by up to 200 percent for businesses and industries that conduct vocational activities, invest in education and offer job training. The training options are diverse, and can be for external needs, such as training programs, apprenticeships, and competency certification for prospective workers.

KOMPAS/HENDRA A SETYAWAN

A student of SMK 1 Ciomas Vocational High School, Bogor, Fachri Muzaki, makes a character for his animated film during the 2019 National Education and Culture Consultation at the Education and Culture Ministry’s Education and Training Center, Depok, West Java, in February (13/2/2019). Improving the quality of human resources is done through the improvement of the education system such as by revitalizing vocational education that is adjusted to the needs of the industry and technological developments.

Job training can also be for internal needs to improve the skills, expertise and competence of current workers. If the training is for current workers, it must have a multiplier effect on the economy, and may not be only for the companies’ own interests.

Second is a maximum 300 percent deduction on taxable incomes for companies that conduct research and development. High-tech industries must increase their workers’ skills through intensive job training, which is usually expensive.

Moreover, we cannot expect much from technology transfers from foreign companies. New and appropriate technologies will determine a business’s efficiency to win the competition.

KOMPAS/HENDRA A SETYAWAN

An experiment for a learning system modeled for industrial processes for students of vocational schools majoring in mechatronics was exhibited at the 2019 National Education and Culture Consultation at the Education and Culture Ministry’s Education and Training Center, Depok, West Java, in February (11/2/2019).

Third is a tax allowance for labor-intensive industries that possess strategic value for the national economy. Investors who invest more or expand their businesses in labor-intensive industries can receive deductions of up to 60 percent of their investment on their taxable income. This tax incentive is also given to pioneering businesses that provide added value and high positive externalities, introduce new technologies and possess strategic value tor the national economy.

They also aim to improve the quality, productivity and competitiveness of the national workforce.

These tax incentives aim to encourage businesses to participate in accelerating improvements to human resource quality and competence, especially in meeting industry needs and encouraging research that promotes technological innovations and mastery. They also aim to improve the quality, productivity and competitiveness of the national workforce.

Synergy among stakeholders is therefore needed in activities related to vocational training centers, skills training institutions, and vocational high schools and polytechnics, as well as the business world and professional associations.

However, the consequences of this tax incentive policy must be calculated, as it could affect the government’s ability to reach its tax revenue target. Besides, the government has already reduced the corporate income tax rate from 25 percent to 20 percent.

Kompas

Workers affix decals to ceramic bowls in May (13/5/2019) at the Indo Porcelain tableware factory in Tangerang, Banten. The company produces about 1.7 million pieces of dishware per month, of which 65 percent is exported to the United States, Europe and other parts of Asia.

In fact, corporate income tax is the main source of the state’s tax revenues. In addition, investing in human capital will take a long time. The technical rules of the tax deduction policy must be elaborated clearly, transparently and in detail in the finance ministerial regulation. It must offer certainty to those businesses that are interested in this program, while also detecting and preventing those with bad intentions. There must also be a comprehensive calculation of how the program will drive productivity and competitiveness.

In business terms, the super deductible tax policy is a cost-based tax incentive. That is, if the program succeeds in increasing efficiency, it will also increase productivity and competitiveness. The program should be highly attractive to the business world.

KOMPAS/ALIF ICHWAN

An officer explains to visitors about tax facilities for companies listed on the stock exchange at a Go Public Workshop, jointly held by the Directorate General of Taxes and the Indonesia Stock Exchange, PT Kliring Penjamin Efek Indonesia and PT Kustodian Sentral Efek Indonesia. The event was held at the Mari\'e Muhammad building, the Directorate General of Taxation, Jakarta, in April (29/4/2019).

Conversely, the government must also compensate for the lower tax realization by increasing private investment. As a result, even though government spending may decline due to the drop in tax revenue, the tax incentive will increase private investment.

ENNY SRI HARTATI, Senior Researcher, Institute for Development of Economics and Finance (Indef)