Tax Buoyancy in Indonesia | Encyclopedia MDPI

Tax Buoyancy in Indonesia: Comparison

Please note this is a comparison between Version 2 by Lindsay Dong and Version 1 by Suhut Tumpal Sinaga.

In Indonesia, the taxation system operates within a family-based framework, where the combined income of all family members is considered a single economic entity for taxation purposes, typically managed by the father. In the realm of taxation, entities or corporations denote groups of individuals or capital functioning collectively, irrespective of their engagement in commercial activities. Value-added tax (VAT) is obligatory for businesses offering taxable goods or services, necessitating their registration as VAT taxpayers.

Indonesia
tax buoyancy
tax structure
tax policy

1. Introduction

In Indonesia, tax administration falls under the purview of the Directorate General of Taxes (DGT), operating under the Ministry of Finance. The DGT comprises two primary components: the head office, responsible for policy formulation, technical regulations, coaching, and administrative support; and operational offices, which handle technical operations and support functions. DGT’s operational structure includes 34 regional offices, 4 large taxpayer offices (LTO), 9 special taxpayer offices, 38 medium taxpayer offices (MTO), 301 small taxpayer offices (STO), 204 tax counseling and consultation service offices, and 4 technical implementation units. Between 2015 and 2021, the organizational structure underwent adjustments in response to regional economic developments, resulting in mergers, removals, additions, and reductions of offices. Taxpayers in Indonesia are categorized into LTO, MTO, STO, or Special Taxpayer Office registrants. LTOs consist of select large taxpayers, while Special Taxpayer Office registrants include foreign investment entities, foreigners, listed companies, and oil and gas firms in Indonesia. MTO registrants are significant taxpayers within specific regional areas, not registered with LTOs or Special Taxpayer Offices. STO registrants are taxpayers within STO’s administrative regions, not registered with LTOs, MTOs, or Special Taxpayer Offices.

2. Indonesia Tax System

2.1. Personal Income Tax

In Indonesia, the taxation system operates within a family-based framework, where the combined income of all family members is considered a single economic entity for taxation purposes, typically managed by the father. A family can consist of a maximum of three dependent children and the wife. Individuals in Indonesia are subject to income tax through various methods, depending on income sources and amounts. For instance, income from business activities below IDR 4.8 billion annually incurs a final tax of 0.5% of the gross income, eliminating the need for recalculations at year-end. Freelance business income below this threshold is taxed based on a deemed taxable income at the rate specified in Article 17 of the Income Tax Law. If their income exceeds IDR 4.8 billion per year, individuals are subject to a progressive tax rate based on net income. Additionally, payroll tax is applied to wages and salaries.

Taxable income encompasses all economically valuable earnings, regardless of origin within or outside Indonesia. However, specific categories, such as aid, grants, and inheritance, remain exempt from taxation. A portion of income remains non-taxable, determined by marital status and the number of dependents at the start of the year. Notably, the non-taxable income threshold was adjusted once from 2015 to 2021, specifically in June 2016, as indicated in Table 1.

Table 1.

Pre-specified non-taxable income.

Taxpayer’s Status	Yearly Non-Taxable Income (IDR)
Taxpayer’s Status	Undisclosed Assets of MSME		Before June 2016	Starting from June 2016
Single	36,000,000

Taxable Income Brackets (IDR)	Tax Rate
Domestic	Overseas	<10 billion	>10 billion
54,000,000
Married	39,000,000
0–50 million	5%
58,500,000
July–September 2016	2%	4%	0.50%	2%
more than 50 million–250 million	15%
October–December 2016	3%	Married, and spouse earning income	75,000,000	112,500,000
Additional for each dependent (max 3)	3,000,000	4,500,000

Indonesia’s progressive income tax system employs varying rates based on income levels, ranging from 5% to 30% between 2015 and 2021, as depicted in Table 2. The calculation involves multiplying taxable income by the applicable rate. Taxpayers may qualify for deductions, such as taxes already paid, which can offset owed taxes. Tax payments must be made to the state treasury before filing an annual tax return, which includes all income sources, assets, investments, and foreign income. The deadline for filing the tax return is within three months after the end of the tax year.

Table 2.

Personal income tax rates.

more than 250 million–500 million
25%
more than 500 million	30%

2.2. Corporate Income Tax

In the realm of taxation, entities or corporations denote groups of individuals or capital functioning collectively, irrespective of their engagement in commercial activities. Comparable to individuals, corporations are accountable under income tax regulations. Taxable income is computed based on net income, derived by deducting business activity costs from gross income. These costs encompass various expenditures like materials, labor, interest, rent, royalties, travel, waste treatment, insurance premiums, promotions, administrative expenses, and more. However, specific costs such as dividend distributions, personal shareholder interest, and payments exceeding a fair value to related parties cannot be deducted. In cases where gross income minus costs results in a loss, this loss can be carried forward to offset income in subsequent years, typically for up to five years, or in specific industries or regions, up to ten years.

Effective from the 2020 tax year, the corporate income tax rate was uniformly set at 22%, indicating a reduction from the previous rate of 25%. Public companies meeting specific criteria and trading their shares on the Indonesia Stock Exchange are subject to a reduced tax rate of 3%. Furthermore, small companies may be eligible for a 50% discount on the tax rate for sales revenue up to IDR 4.8 billion. A small company is defined as a local business generating annual earnings of up to IDR 50 billion. A distinctive tax mechanism imposes a 0.5% tax rate on businesses earning IDR 4.8 billion annually. Corporate taxpayers can benefit from this facility for three years, while individual taxpayers are eligible for up to seven years. Similarly to individual taxpayers, corporate entities are mandated to file their annual tax returns, with the submission deadline set at four months after the conclusion of the tax year.

2.3. Value-Added Tax

Value-added tax (VAT) is obligatory for businesses offering taxable goods or services, necessitating their registration as VAT taxpayers. Entities earning less than IDR 4.8 billion annually have the option to abstain from registration. Registered taxpayers must collect VAT from buyers, providing a tax invoice as evidence. Multiple business locations typically mandate individual registration based on their respective locations. However, specific criteria allow registration at a single location.

A pivotal characteristic of VAT lies in its non-cumulative multi-stage levy. It is imposed at every production, distribution, and consumption stage, with the VAT owed calculated by deducting VAT paid on purchases (VAT input) from the tax charged to customers (VAT output). This mechanism ensures efficient VAT collection, even if the collection chain is disrupted. Non-registration or tax avoidance may escalate VAT revenue losses due to cascading effects. VAT computation utilizes the indirect subtraction method, deducting VAT input from VAT output for each taxable transaction. The DGT employs an automated system to verify accurate VAT collection and payment, ensuring regulatory compliance.

Taxes generally apply to most goods and services unless explicitly exempted. The negative list outlines goods and services exempt from taxation, including natural resources acquired through mining, essential items, restaurant food, money, gold, securities, as well as services in health, social sectors, finance, education, religion, arts, broadcasting, public transport, labor, hotels, and government services.

During the study period, a 10% VAT rate was applied, except for exported goods and services, which were zero-rated. Starting on 1 July 2020, a gradual VAT collection process commenced for 148 online businesses, which were predominantly foreign, delivering goods within Indonesia’s customs area. These businesses collected VAT totaling IDR 731.4 billion, IDR 3.9 trillion, and IDR 5.51 trillion in 2020, 2021, and 2022, respectively. VAT payable is calculated monthly and must be reported by the end of the subsequent month following the tax period’s conclusion.

2.4. Tax Policy Changes

In July 2016, Indonesia launched a comprehensive tax amnesty program, enabling individuals and businesses to disclose undisclosed assets and settle outstanding taxes by paying a specified redemption amount. This initiative, spanning income tax and VAT, allowed taxpayers to participate until 31 March 2017, with varying redemption rates based on the location of undisclosed assets. Notably, micro, small, and medium-sized (MSME) taxpayers were eligible for special rates, outlined in Table 3. The program resulted in substantial revenue, with a total of IDR 130 trillion collected, involving nearly one million taxpayers, including both new registrations and existing participants (Kominfo 2017; Kontan 2017).

Table 3.

Tax amnesty redemption rates.

Tax Amnesty Periods	Location of Undisclosed Assets
Tax Amnesty Periods	6%
0.50%	2%
January–March 2017	5%	10%	0.50%	2%

Furthermore, amid the economic challenges posed by the COVID-19 pandemic, Indonesia implemented exceptional tax policies to support national recovery efforts. These policies encompassed adjustments in corporate income tax rates, modifications in taxation procedures for electronic trading activities, extensions in the implementation period for rights and tax obligations, and customs facilities such as duty exemptions or reductions. Specifically, from the tax year 2020 onwards, the corporate income tax rate for local businesses and permanent establishments was reduced from 25% to 22%, with a 3% reduced rate applicable to specific domestic public companies meeting defined criteria. Additionally, starting from 1 July 2020, the import of intangible taxable goods and services through electronic trading was subject to collection, remittance, and reporting by designated foreign traders or domestic marketplaces. These measures represent Indonesia’s multifaceted approach to addressing both fiscal challenges and the evolving landscape of international trade.

References

Kominfo. 2017. Realisasi Tax Amnesty, Deklarasi Rp4813,4 Triliun dan Repatriasi Rp146 Triliun. Available online: https://www.kominfo.go.id/content/detail/9520/realisasi-tax-amnesty-deklarasi-rp48134-triliun-dan-repatriasi-rp146-triliun/0/berita (accessed on 13 July 2023).
Kontan. 2017. Tax Amnesti Hasilkan 44232 Wajib Pajak Baru. Available online: https://nasional.kontan.co.id/news/tax-amnesty-hasilkan-44232-wajib-pajak-baru (accessed on 13 July 2023).