Fuelling the Recovery
How India’s path from fuel subsidies to taxes can help Indonesia
A tax increase of just IDR 500 (~USD 3.5 cents) per litre for gasoline and diesel (less than 8% of retail prices) would provide IDR 31 trillion (USD 2.2 billion) per year in revenue for Covid-19 recovery
Indonesia has the lowest tax-to-GDP ratio of similar emerging economies: taxing polluting fossil fuels is an efficient and effective way to boost revenues
India’s experience shows that it is politically and economically possible to transition from high fuel subsidies to relatively high fuel taxes, delivering significant revenue for social and economic recovery
Over the past decade, India transitioned from high transport fuel subsidies to relatively high taxes, delivering significant revenue that most recently have funded the country’s COVID-19 response. Indonesia’s transport fuel taxes of 15% are offset by price subsidies that erode revenues. Drawing on India’s experience, this brief recommends Indonesia phase in higher fuel taxes simultaneously with subsidy reform efforts. A tax of IDR 500 (~USD 3.5 cents) per litre for gasoline and diesel (less than 8% of retail prices) would provide IDR 31 trillion (USD 2.2 billion) per year in revenue (2% of current government revenue). Revenues could be earmarked for highly visible programs to boost productivity and to alleviate the impact of the pandemic and higher energy prices on the poor, particularly in regional areas. In implementing the tax, Indonesia can build on its strong experience implementing social support and economic stimulus measures in the context of fuel subsidy reforms in 2005 and 2015. The tax increase could be publicized as an emergency budgetary measure, as done in India, which may improve public acceptance.
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