Tax Perks of the Nusantara Capital City

By Andrean Rifaldo, the Directorate General of Taxes officer

Back in 1957, the first president and proclaimer of independence, Ir. Soekarno, proposed relocating the capital when he inaugurated the construction of Palangka Raya.

However, for the next six decades, this idea stalled until Joko Widodo seriously pursued it during his second term of presidency in 2019. The development of the Nusantara Capital (IKN) was then included in the list of strategic projects in the development plan until 2045.

Relocating the nation’s capital to Kalimantan is no small decision. Over Rp71 trillion of the national budget is being allocated to build IKN, which is planned to be inaugurated on August 17, 2024.

However, infrastructure alone isn't enough to bring Nusantara City to life. The government needs to involve the community and investors to help boost the IKN economy.

To encourage people to move and invest in IKN, various incentives are being offered. Government Regulation (PP) No. 12/2023 includes tax incentives as part of these efforts.

There are several types of tax incentives available for those interested in participating in IKN's development, targeting at least eight different groups.

Firstly, domestic companies that invest at least Rp10 billion in certain priority sectors in IKN receive a 100 percent income tax discount (tax holiday). This full tax exemption can last up to 30 years, depending on the sector and when the investment starts.

The tax discount scheme for businesses isn't new. Since 1994, income tax incentives have been offered to companies investing in specific regions and sectors.

However, for companies outside IKN, the investment amount must be much higher—at least Rp100 billion to get a 50 percent discount, and Rp500 billion to get a 100 percent discount. The benefit period is also shorter, with a maximum of 20 years.

Secondly, MSMEs (Micro, Small, and Medium Enterprises) in IKN are given a tax exemption on annual turnover up to Rp50 billion. This applies to both individuals and businesses and is available until 2035.

This scheme isn't entirely new. For MSMEs outside IKN, the tax exemption only applies to individual entrepreneurs with an annual turnover of up to Rp500 million.

Thirdly, the government will cover the income tax for employees living and working in IKN until December 2035. This means that residents of IKN, whether they work in the private sector or for the government, will be exempt from income tax.

This policy is particularly noteworthy because, until now, the government has only covered the income tax for civil servants, military personnel, and police officers. With this incentive, the government will also cover the income tax for private sector employees in IKN.

Fourthly, financial institutions located in the financial center of IKN are also offered income tax discounts for up to 25 years. Banks and insurance companies get a 100 percent tax discount, while other financial service institutions receive an 85 percent discount.

Furthermore, foreign investors who earn income from the financial center in IKN are exempt from taxes for 10 years from the time they invest their capital.

Fifthly, to boost the competency of the workforce, tax incentives are also granted to businesses conducting vocational education programs in IKN. These programs include internships, practical work, and training.

The incentive takes the form of a super deduction, allowing a reduction of 250 percent from the costs incurred in organizing the vocational education program. This deduction reduces the taxable net income.

For instance, if a company with a turnover of Rp500 million invests Rp150 million in a vocational education program in IKN, it can deduct Rp375 million (250 percent of the actual cost). Therefore, the taxable net income decreases to Rp125 million, down from the initial Rp350 million.

Sixthly, fiscal income reduction incentives are also extended to companies conducting research and development (R&D) activities in IKN. These incentives allow for deductions of up to 350 percent of the expenses incurred for R&D activities.

While R&D tax incentives have been in effect nationwide since their establishment by Government Regulation No. 45/2019, the maximum deduction outside IKN is slightly lower, capped at 300 percent. This increase in incentives is aimed at positioning IKN as a national research center.

Seventhly, individuals and businesses that contribute facilities to IKN are also eligible for tax incentives, allowing for fiscal income reduction of up to 200 percent of the contribution's value. Contributions can include monetary donations, goods, or physical development costs and apply to contributors both within and outside IKN.

Lastly, certain transactions involving the transfer, sale, and import of specific goods and services in IKN are also granted exemptions from value-added tax (VAT). This includes transactions such as building rentals, the sale of new buildings and domestically produced electric vehicles, as well as the import of machinery and equipment for new and renewable energy power plants.

Additionally, the sale of residential properties and luxury homes to individuals, companies, and government institutions based, working, or operating in IKN is also exempt from luxury goods sales tax (PPnBM).

With the array of tax incentives offered, IKN appears to have been designed by the government as a tax haven. The term "tax haven" refers to areas that offer very low tax rates to attract investors from outside the region.

This is actually a positive development as it opens up opportunities for IKN to become an economic hub not only at the national but also at the international level. There are numerous examples of how tax incentives have supported the success of many countries in creating the thriving cities we see today.

Take Singapore, for example, which is also considered a tax haven. Its success as a global trading hub today is supported by lenient tax policies such as lower income tax rates and tax exemptions on investment profits. Its prestigious reputation as a tax haven is also a key factor in the progress of Switzerland and Hong Kong.

The leniency of taxes in these areas makes them attractive for individuals and global conglomerates to park their capital and wealth. For the local population, the impact is highly positive, as it creates numerous new job opportunities and improves economic quality.

This is something that could be replicated by implementing tax incentives for IKN. Flooding IKN with tax discounts is a wise decision as it can build IKN's reputation as an investment-friendly area.

*) This article represents the author's personal views and does not represent the stance of the institution. The Indonesian version of this article has been published in Kompas.com on May 20th, 2024.

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