Jakarta. President Joko "Jokowi" Widodo unveiled new tax breaks for property purchases to invigorate the country's housing sector, in a bid to bolster Indonesia's resilience against the uncertain global economy.

The government has decided to waive the value-added tax (VAT) on home purchases priced up to Rp 2 billion ($126,000) until June 2024. From June onwards and through the end of the year, a 50 percent discount on the VAT will be applied to these purchases.

Addressing the BNI Investor Daily Summit 2023 on Tuesday, President Jokowi stated, “Our goal is to incentivize the property sector to sustain our economic growth.”

Southeast Asia's largest economy, Indonesia, has consistently registered growth above 5 percent in recent quarters. The nation has also posted trade surpluses and maintained a positive state budget this year. However, the massive withdrawal of foreign funds, reminiscent of patterns observed prior to past economic downturns in Indonesia, remains a concern.

"Capital outflows are predominantly moving towards the United States, complicating the economic scenario," remarked Jokowi.

The ongoing conflicts in Russia, Ukraine, and more recently between Israel and Hamas further threaten global stability, potentially driving up world oil prices. Jokowi emphasized the gravity of the situation, noting that an escalation, especially in regions like Lebanon, Syria, and Iraq, would significantly disrupt the global economy due to potential spikes in oil prices.

Considering these global tensions, Jokowi stressed the need to fortify Indonesia's domestic economy. The property and construction sectors are of particular concern as they contribute between 14 and 16 percent of the GDP and generate significant revenue for both central and local governments.

Details on the Tax Incentives

"Our goal is to stimulate our economy by offering incentives for the housing and property sectors. The property industry has extensive ripple effects, impacting 114 associated industries, including those producing sand, cement, doors, glass, ceramics, and many others," Jokowi said.

Later on Tuesday, President Jokowi chaired a meeting that outlined a series of fiscal incentives targeting the property sector. The central feature of this initiative is the full absorption of VAT by the government on new home purchases below Rp 2 billion until June 2024. After this period, the government will cover 50 percent of the VAT, a strategic reduction designed to maintain market dynamics while ensuring fiscal responsibility.

Additionally, subsidies have been allocated to support low-income families. These grants, totaling Rp 4 million, cover administrative expenses related to home purchases, including the buyer's property transfer tax (BPHTB), and are available until 2024. The government has yet to announce when the new tax incentive will be effective.

Optimism in the Property Sector

Rusmin Lawin, a deputy chairman of Real Estate Indonesia (REI), expressed enthusiasm about the new measures. He believes that these incentives, which have been sought for the past five years, can significantly bolster property sales. Highlighting the government's recent decision to allow property sales to foreigners, Rusmin said, “I am optimistic that our sales could increase by 50 percent next year.”

Rusmin also identified a growth potential in homes priced between Rp 200 million and Rp 1 billion, which is higher than the heavily subsidized segment targeting low-income families. The tax relief means many, including government officials, military personnel, and millennials in the private sector, can now aspire to buy their first homes.

Currently, an 11 percent VAT is levied on any house purchase in Indonesia, posing a substantial hurdle for first-time buyers.

In response to Jokowi's announcement, several property companies witnessed a surge in their stock prices on the Indonesia Stock Exchange on Tuesday. For instance, Alam Sutera Realty stocks rose by 1.8 percent, while Ciputra Development saw a 3.5 percent increase. The property sector drove the benchmark index, which closed 0.9 percent higher.