JAKARTA – Regardless of the form, companies aim to generate profits, and dividends represent a means of distributing these earnings. This aligns with the primary objective of capital owners when investing. But what about the taxation aspect? According to Indonesian tax regulations, any form of income, including dividends, is subject to income tax (PPh). However, dividends can be exempted from tax as long as they are reinvested in Indonesia, aiming to facilitate business ease and encourage investment. The legal basis for this lies in Law No. 7/2021 on Tax Regulation Harmonization and Minister of Finance Regulation No. 18/2021. Data compiled from the Indonesia Stock Exchange (IDX) website shows that from 2018 to 2023, approximately Rp1.186 trillion worth of dividends were distributed, with the financial sector (40.7%), consumer goods (18.65%), energy (13.65%), infrastructure (11.11%), and industry (6.16%) constituting the largest distribution sectors. Some companies have even increased their dividend payouts by up to 300% (meaning dividends exceed profits).
Furthermore, data from the Deposit Insurance Corporation (LPS) website for the same period indicates several indicators of increased investment activity by households, such as the rise in the number of investors in the capital market, increased investment in government securities, and growth in both nominal value and the number of accounts in commercial banking. Several countries also employ tax exemptions on dividends as part of their economic policies with varying objectives. South Korea aims to boost consumption (Lee et al., 2023), Sweden to foster entrepreneurship and enhance investment allocation (Alstadsæter et al., 2017), and the United States to provide short-term support for investment and capital to build factories (Yagan, 2015). In the Indonesian context, it is crucial to assess whether the policy of tax-free dividends genuinely stimulates investment, encourages dividend distribution to shareholders, and, more importantly, translates into corporate investment in real capital with cheaper cost of capital due to tax exemptions. Let’s examine the requirements. First, investments must be made no later than the end of the third month after the tax year in which the dividends were received or obtained, and must be held for a minimum of three tax years without being transferable unless to other forms of investment. Second, there is an obligation to submit periodic reports on investment realization for three years. Third, it must be disclosed in the Annual Tax Return (SPT) in the column for non-taxable income. It should be noted that only dividends that are invested are exempted from tax. If only a portion is invested, the remaining portion not invested will be subject to income tax as per general provisions. Additionally, there are 12 types of investment instruments, including placements in financial market instruments and non-financial market instruments, encompassing all legitimate investment forms according to Indonesian laws and regulations. This includes capital participation as shareholders in newly established or existing companies domiciled in Indonesia. As the objective of this policy is to encourage investment, an evaluation of the policy should be conducted, including measuring its impact on real investment allocation by companies (Anderson, 2015). In the context of this dividend exemption policy, the output can be seen in how many dividend recipients have invested their funds in the designated instruments. However, for the outcome, it is essential to carefully observe whether the invested funds are used by companies for real investment, such as establishing factories, purchasing machinery, fixed assets, and new equipment. Instead of investment, companies often allocate received funds to portfolio investments (saving) or do not genuinely utilize them in real-sector investments. This is crucial, considering that the concept of investment considered in a country’s economy is reflected in the calculation of Gross Domestic Product (GDP). To achieve economic growth, new investments with additional plant, property, and machinery are needed. Factories, machinery, equipment, and new materials will increase a country’s physical capital stock and create opportunities for increased output (Mankiw, 2016). Tax incentive policies need to consider the trade-offs between reduced revenues and potential benefits. If intended to boost investment, potential losses from the incentives, low compliance costs, and the potential for income shifting should be considered (Alstadsæter, 2017). Therefore, tax-free dividends should be combined with other policies from cross-sectoral regulators that support small and medium enterprises’ investment and development of the capital market to provide opportunities for broader participation in economic activities. With increased investment, positive impacts on economic growth, employment, and production are expected, ultimately leading to enhanced societal welfare.
