2

Outline

• Indonesia’s Fiscal Policies

Recent Fiscal Development

• Taxation on Shariah business • Government Support • Strategic Plan

Fiscal Policy on Shariah Business

• Conclusion Conclusion

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

Indonesia’s Fiscal Policy

3

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

(0.9%)

(1.3%)

(0.1%)

(1.6%)

(0.6%)

(2.1%)

2006 2007 2008 2009 2010 2011RevisedBudget

(0.4) (0.6)(2.1) (2.3) (2.4) (2.6) (2.9) (3.1) (3.2) (3.9)

(5.3)

(8.3)

Per

u, B

BB

-

Indo

nesi

a,B

B+

Bra

zil,

BB

B-

Vie

tnam

,B

B-

Col

ombi

a,B

BB

-P

hilip

pine

s,B

BM

exic

o,B

BB

BB

BM

edia

n

BB

Med

ian

Tur

key,

BB

S. A

fric

a,B

BB

+

Indi

a, B

BB

-

Source: Ministry of Finance as of February 2011

Unemployment Continues to Outperform Developed Market Counterparts

State Budget is Directed to Reduce the Poverty Level

Source: Ministry of Finance

40.749.8

57.773.8 68.6

81.8

020406080

100120

2006 2007 2008 2009 2010 2011RevisedBudget

11%12%13%14%15%16%17%18%19%

Social Expenditure (LHS)People living below poverty line (RHS)

Rp tn

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

Strong Fiscal Position vs. Peers 2010 Surplus/ (Deficit) (% of GDP)

Consistent Fiscal Sustainability 2010 Surplus/ (Deficit) (% of GDP)

Source: Ministry of Finance and S&P

Avg. = (1.1%)

USD9.1bn#

4.1% 4.6%6.8% 7.0% 7.7% 8.0% 9.1% 9.7%

12.2%14.3%

15.8%

21.0%

Chi

na

Japa

n

Indo

nesi

a

Ger

man

y

UK

Italy

US

Fra

nce

Por

tuga

l

Irel

and

Gre

ece

Spa

in

Reaping the Rewards of Proactive Fiscal Policy

4

55.064.3

72.7 75.9 80.3

141.0

0

20

40

60

80

100

120

140

160

2006 2007 2008 2009 2010 2011 Budget6%

7%

8%

9%

10%

11%Capital expenditure (LHS)Unemployment (RHS)

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

Rp tn

Source: Ministry of Finance

Increased Allocation for Capital Expenditures in the Annual Budget as Subsidies Decrease

USD15.7bn

Targeted Infrastructure Spending through Capital Expenditure Helps Lower the Unemployment Rate

Interest Payment

12%

Material Exp16%

Subsidy26%

Social Exp9%

Others1% Personnel Exp

20%

Capital Exp16%

2011 Budget

Capital Exp9%

Personnel Exp15%

Others10%

Social Exp7%

Subsidy33%

Material Exp8%

Interest Payment

18%

2005 Budget

Renewed Focus on Capital Expenditures

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

-2.5

-2.0

-1.5

-1.0

-0.5

0.0 2005 2006 2007 2008 2009 2010 2011 2012

Sustainable Fiscal Management

Debt to GDP Ratio Has Been Sharply Declining Since Crisis Period

Fiscal Deficit (% of GDP)

8-year fiscal deficit average= -1.1%

Source: FPO

85% 89%

77%

67% 61% 57%

47% 39%

35% 33% 28% 26.1% 24.9% 23.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1999 2001 2003 2005 2007 2009 2011-Revised budget

GDP Outstanding Debt Debt to GDP Ratio (RHS)

(Trillion IDR)

7

Debt to GDP ratio of Indonesia is better than some BBB- Countries rating.

Debt To GDP Ratio: A Comparison

Source: IMF, OECD, Ministry of Finance

22.4725

36.31 38.3342.80 44.12

52.79

65.71 68.20

79.78

110.85

0

20

40

60

80

100

120

Peru Indonesia Colombia Panama Tunisia Croatia Uruguay Brazil India Hungary Portugal

8

2. Fiscal Policy Support for Sharia Business Activities

10

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.

11

1. Amendment income tax Act No. 36/2008,

(implemented since 2009 )

2. Amendment VAT Act No. 42/2009,

(implemented since 2010 )

After 2009/2010

Transition Tax borne by government for VAT transactions (caused by unequal tax treatment)

12

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

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 between sharia banks and customers as the debtors

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

15

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

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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

Strategic Plan 2010 - 2014

Islamic Financial Market Development of Indonesia

Islamic banking

Takaful

Financial Markets

Sukuk

1992 1997 1999 2001 2003 2006 2008

1980 1994 2000 2002 2004 2007

▪ 1st Takaful Company Asuransi Takaful Keluarga

▪ 1st Islamic Bank Bank Muamalat Ind

▪ 1st Takaful Branch Assi Great Eastern

▪ 1st Islamic Branch Bank IFI Syh ▪ 2nd Islamic Bank Bank Syh Mandiri

▪ Islamic Banking Act (2009)

▪ Office Channeling

▪ 1st Islamic Re-ins ReINDO

▪ Islamic Money Market (IMA Certificate) ▪ Jakarta Islamic Index

▪ Islamic Capital Market ▪ ICM Master Plan (2005)

▪ 1st Corporate Sukuk Indosat (Mudharabah) - 2003

▪ Sukuk Guidelines (2006)

Sukuk Act (2008) Issue State SUKUK

• 1st Shariah Fund PT. Danareksa

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

20

0 5 10 15 20 25 30 35 40 45 50

0 1000 2000 3000 4000 5000 6000 7000 8000 9000

2005 2006 2007 2008 2009 28 Feb 2011

Total Value of Sukuk Emission (Rp Billion) Total Number of Sukuk Issuance

Progress for Total Value of Sukuk Emission and Total Number of Sukuk Issuance 2005-2011

0

10

20

30

40

50

60

0

1000

2000

3000

4000

5000

6000

2005 2006 2007 2008 2009 28 Feb 2011

Total NAB (Rp Billion) Total Number of Syariah Mutual Funds

Progress for Total Net Asset Value (NAV), and Total Number of Syaria Mutual Funds 2005-2011

0

500

1000

1500

2000

2500

3000

2005 2006 2007 2008 2009

Gross Premium Claim Investment Assets

Progress for Key Indicators of Insurance and Reinsurance Company Based on Syaria Principles 2005-2009

Source: Ministry of Finance

Sharia-based Capital Market and non bank financial institution Products are Growing significantly…

21

Source: Ministry of Finance

Composition of Government Securities

Item Realization on August 31, 2011 (IDR)

Government Securities 143.073.910

Government Bond Securities 122.592.500

Government Islamic Securities 20.481.410

22

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

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

Promoting Equality of Sharia Financial Products with Conventional Products. a. Product creation process b. Product issuance procedures c. Publishing products liability d. Taxation treatment

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

Strategic Plan: Islamic Capital Market and Islamic Non Bank

Financial Institutions 2010 - 2014

Source: Ministry of Finance

Strategic Plan

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.

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