Indonesia considering carbon tax under major tax overhaul

Indonesia has drawn up proposals to bring in a carbon tax to curb greenhouse gas emissions, in addition to raising VAT rates and reforming income tax, as part of a major overhaul of the tax system, a finance ministry document showed.

The document, uploaded on Friday, provides a more detailed look at the options the government is considering than in a presentation to parliament a day earlier.

For the carbon tax, emissions on the use of fossil fuels such as coal, diesel and gasoline by factories and vehicles could be targetted, the document said, noting there could be a focus on “carbon intensive sectors such as the pulp and paper, cement, electricity generation and petrochemical industries”.

Indonesia, which is a leading producer of coal, gas and oil, is one of the world’s largest greenhouse gas emitters, due in large part to a rapid rate of conversion of rainforests and carbon rich peatlands.

Noting a carbon tax would add to business costs, the ministry said it should be accompanied with policies to bolster people’s purchasing power “to lower resistance and unintended impacts”.

Revenue from the tax would be used to invest in environmentally friendly sectors and welfare programmes, the ministry said.

The Indonesia Coal Mining Association said it had not been consulted about the plan, but warned additional taxes would put further pressure on what is already a sunset industry.

“The second point is, if we’re talking about reducing carbon, we’ve done many practical efforts,” said Executive Director Hendra Sinadia, pointing to reclamation efforts to reduce the rate of deforestation and technology to curb coal power plant emissions.

In another part of the proposed reforms, the government is also examining the addition of more bands in personal income tax brackets as part of an attempt to “create a more healthy and just tax system,” it said, without elaborating.

Indonesia currently has four tax brackets ranging from 5% to 30%, but there have been recommendations from organisations such as the International Monetary Fund to broaden this to include the middle class and make the system more progressive.

Other policy proposals include raising value added tax rates and removing numerous exemptions that the government thinks have distorted business competitiveness.

A 10% VAT rate is currently applied to most sales of goods and services, with exemptions given to some agricultural products, staple food and healthcare and education services.

This article was originally shared by Reuters.