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Issues with Indonesia’s new income tax policy

Indonesia
Indonesia relies heavily on the tax sector for its revenue, with taxes accounting for 75% of the national budget. The principle problem faced by the country in this respect is a low level of tax compliance. Although there is a very large reservoir of potential taxpayers, empirical data show that only 60% of potential taxpayers have registered and only 20% of those registered have paid their taxes while the rest have claimed that they owe nil tax in their annual income tax returns (SPT).

The difficulty in calculating the tax payable is the main reason for the taxpayers’ reluctance in preparing and filing their annual tax returns. The objective of Indonesia's new income tax policy is therefore to simplify the calculation of tax payable so as to encourage taxpayers to voluntarily register and pay their taxes. Taxand Indonesia investigates this new policy and its possible impact on businesses operating within the jurisdiction.

The details of these new taxation policies are:

  • A new tax audit strategy – this involves the definition of an individual and corporate tax audit, particularly business groups and taxpayers involved in transactions with related companies (transfer pricing)
  • The number of taxpayers designated as withholding tax agents will be increased - previously, government treasurers were designated as withholding tax agents in respect of their suppliers. Now, the role of tax collector will be expanded to include state-owned enterprises and production sharing contractors, which will now have to collect tax from their suppliers. In addition, pharmaceutical firms, cement manufacturers, paper producers and automotive steel manufacturers will also be required to withhold tax from their distributors in respect of the sales of their products by such distributors.

The Indonesian government faces major constraints in its efforts to enhance revenue collection as a large number of small and medium enterprises (SMEs) are not registered as taxpayers. Even those SMEs that are registered find it very difficult to fulfil their tax obligations due to the complexity of the regulations. In order to overcome these problems, the Indonesian Chamber of Commerce and Industry (KADIN), businesses and industrialists have all proposed that simplified tax regulations should be issued to accommodate the needs of SMEs.

In response to these proposals, the government issued Government Regulation No. 46 of 2013, which sets a tax rate of 1% of the turnover of taxpayers that have a gross annual income of less than IDR 4.8 billion. The tax subjects in Government Regulation 46 of 2013 are every individual and corporate taxpayer except for permanent establishments. Those exempt from the ambit of Government Regulation 46 are individual taxpayers who derive income from work, professionals, entertainers, intermediaries, advertising agents etc. (including individual taxpayers that take the form of itinerant traders), and corporate taxpayers that have yet to commence commercial operations. The eligibility and mechanics of Government Regulation 46 are:

  • The income from a business in a situation where the gross turnover does not exceed Rp 4.8 billion per annum (excluding income arising from self employment such as earned by professionals, entertainers, preachers, athletes)
  • Income that has already been subjected to final tax, such as land and building sale and purchase transactions, land and building lease, shares sold in the capital market, interests on savings, bank deposits, bonds, etc paid by banks gits, construction services, and income from overseas

Implementation of Government Regulation 46 of 2013

Since Government Regulation 46 came into effect on 1 July 2013, all taxpayers who satisfy the above criteria no longer need to pay the monthly article 25 income tax instalments, except in respect of tax objects that are excluded from the ambit of the regulation. Consequently, the losses suffered by the taxpayer cannot be set off against the following year’s income.

Consequences of Government Regulation 46 of 2013

The coming into effect of this regulation has served to make the Indonesian tax system even more complicated as taxpayers are now differentiated. Now, taxpayers are split into those that are subject to the normal provisions of income tax aw and those who are subject to special tax regimes such as Regulation 46, as characterised by final income tax and different tax rates, such as:

  1. income earned from transactions on the stock market (0.1% and 0.5%)
  2. income arising out of transactions involving the sale and purchase of land and buildings (10%)
  3. income earned from the provision of construction services (2%-4%)
  4. income arising from businesses whose gross turnover does not exceed IDR 4.8 billion (1%)

Another consequence of Government Regulation 46 of 2013 is that there are now two ways of making monthly income tax payments for the same tax period: payment of monthly article 25 income tax instalments on gross income arising from ‘Other Income’; and/or income from overseas. For example, an individual taxpayer operates a retail shop and at the same time is self- employed as an architect. So, he has two business activities and is required to pay two kinds of tax payments: first, the 1% final income tax under GR 46 and second, the monthly tax instalment payment under Article 25 of the income tax law. So with Government Regulation 46, the tax payment system has become more complicated for the taxpayer.


Your Taxand contacts for further queries are:
Prijohandojo Kristanto
T. +62 21 835 6379
E. prijohandojo@pbtaxand.com

Suryohadi Djulianto
T. +62 21 8399 9919
E. suryohadi@pbtaxand.com

 

Taxand's Take

Government Regulation 46 has disappointed businesses as it is not in line with their proposals. Businesses had sought the establishment of a special tax regime for SMEs that would encourage them to pay taxes and facilitate them in doing so with reduced complexity. As it turns out, the targets of Government Regulation 46 of 2013 are not actually SMEs*, but rather all taxpayers whose annual turnovers does not exceed IDR 4.8 billion. Meanwhile, small (micro) enterprises, such as street vendors, hawkers, etc, are not affected by the new regulation. In fact, they continue to be covered by the Income Tax Law (which applies a higher tax rate). The Indonesian tax system is becoming increasingly complicated. MNCs that operate in Indonesia will be governed by Government Regulation 46 of 2013 provided that their gross turnovers do not exceed IDR 4.8 billion per year so it is advisable to monitor and assess the impact of these changes.

* In Indonesia the criteria for SMEs are not clearly defined.  In general, the people as well as the Ministry of Cooperatives see the SMEs as small companies. Whereas the Directorate General of Taxes classified the taxpayers into two groups: the very large taxpayers comprising of big corporations such as MNCs, and the usual taxpayers. That is why, using the gross turnover as the basis for charging tax under Regulation 46 does not cover only the SMEs but also includes the MNCs as long as their gross annual turnover do not exceed  IDR 4,8 billion. Regulation 46 also excluded the micro enterprises such as the street vendors, hawkers, etc as tax subject. 

Taxand's Take Author

Prijohandojo Kristanto

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