JAKARTA – The pursuit of profit remains a fundamental objective for businesses, with dividends serving as a key avenue for profit distribution. This aligns with investors’ intentions when committing their capital. But how does taxation come into play? Under Indonesian tax regulations, any form of income, including dividends, falls under the purview of income tax (PPh). However, dividends can be exempt from taxation provided they are reinvested within Indonesia, aiming to facilitate business operations and bolster investment. This regulatory framework is anchored in Law No. 7/2021 on Tax Regulation Harmonization and Minister of Finance Regulation No. 18/2021. Data sourced from the Indonesia Stock Exchange (IDX) reveals that from 2018 to 2023, dividends totaling approximately Rp1.186 trillion were distributed, with the financial sector (40.7%), consumer goods (18.65%), energy (13.65%), infrastructure (11.11%), and industry (6.16%) emerging as the prominent distribution sectors. Notably, some companies have even augmented their dividend payouts by up to 300%, exceeding their actual profits.
Furthermore, data from the Deposit Insurance Corporation (LPS) website for the same period indicates a surge in investment activities among households. This includes a rise in the number of investors participating in the capital market, increased investments in government securities, and a notable expansion in both the nominal value and the number of accounts in commercial banking. Several nations have also implemented tax exemptions on dividends, each with distinct economic objectives. For instance, South Korea seeks to stimulate consumption (Lee et al., 2023), Sweden aims to foster entrepreneurship and enhance investment allocation (Alstadsæter et al., 2017), while the United States focuses on providing short-term support for investment and capital formation (Yagan, 2015). In the Indonesian context, it is imperative to assess whether the policy of tax-free dividends effectively stimulates investment, encourages dividend distribution to shareholders, and ultimately translates into tangible corporate investments. Let’s delve into the prerequisites. First, investments must be executed no later than the end of the third month following the tax year in which the dividends were received, with a minimum investment period of three tax years, barring transfer unless to alternative forms of investment. Second, companies are obligated to submit periodic reports on investment realization over three years. Third, such investments must be duly disclosed in the Annual Tax Return (SPT) under the non-taxable income category. Notably, only dividends that are reinvested are eligible for tax exemption, with any portion not reinvested subject to income tax per prevailing regulations. Additionally, there are 12 designated investment instruments, encompassing placements in financial market instruments and non-financial market instruments, all in accordance with Indonesian laws and regulations. These include equity participation as shareholders in both newly established and existing companies domiciled in Indonesia. Given that the primary aim of this policy is to spur investment, a comprehensive evaluation of its efficacy is imperative, including an assessment of its impact on actual investment allocations by companies (Anderson, 2015). In the context of the dividend exemption policy, the output is evident in the extent to which dividend recipients invest their funds in designated instruments. However, the outcome necessitates a meticulous examination to ascertain whether these investments are channeled towards tangible, real-sector ventures, such as facility expansions, equipment acquisitions, and other capital expenditures. Instead of genuine investments, companies often opt for portfolio investments or fail to direct the funds towards real-sector endeavors. This is particularly significant given that a country’s economic growth hinges on investments in tangible assets, such as factories and machinery, which bolster productivity and output (Mankiw, 2016). Tax incentive policies must strike a delicate balance between reduced revenues and potential benefits, considering factors such as potential losses, compliance costs, and the risk of income shifting (Alstadsæter, 2017). Hence, tax-free dividends should be complemented by other regulatory measures aimed at supporting small and medium enterprises and fostering capital market development, thereby broadening participation in economic activities. By stimulating increased investment, these initiatives are poised to yield positive outcomes, including enhanced economic growth, job creation, and heightened production, ultimately contributing to overall societal well-being.
