Explore Indonesia’s unique taxation system, covering individual tax slabs, business income taxation, corporate income tax, value-added taxation, and positive developments for taxpayers. Learn about the diverse income classifications and exemptions within the Indonesian tax framework. For accurate tax compliance, verify information and consult professionals.
Renowned globally as the former president of the G20 nations, Indonesia stands as an archipelago comprising thousands of islands, a blend of religions, and a diverse populace steeped in various cultures. Its remarkable resilience as a modern nation is worth studying, especially its taxation system, which distinguishes itself through lower taxes on interest, dividends, and more.
To delve into the specifics of Indonesia’s taxation system, one can begin by exploring the official website of the Indonesian tax authority, which serves as a comprehensive source of information: www.pajak.go.id.
Types of Individuals Seeking TIN Registration
Indonesia’s taxation system presents a unique approach to Individual Taxpayer Identification Numbers (TIN), catering to various categories of individuals:
- Individual Taxpayer Conducting or Not Conducting Business or Independent Personal Service: This category encompasses a wide range of individuals, including employees, entrepreneurs, freelancers, and traders.
- Individual Taxpayer Not Meeting Tax Law Requirements: Individuals who don’t meet the subjective or objective criteria of tax laws and regulations, such as job applicants or students who have not yet earned an income.
- Other Income Earned from a Different Business Location: Individuals generating income from a business location other than the one registered with the Tax Office (KPP) and different from their residence.
- Undivided Inheritance Income: Individuals inheriting from a deceased person who did not possess a TIN.
Individuals seeking TIN registration can conveniently complete the process online by filling out the registration form available on the official website and submitting the required documents.
Tax Return Reporting Dates
The submission deadlines for reporting notification letters (SPT) vary for different types of taxpayers:
- Annual SPT for Individual Taxpayers and Undivided Inheritance Taxpayers: Due within 3 months after the end of the tax year, by March 31.
- Corporate Taxpayers: Required to submit annual SPT within 4 months after the end of the tax year, by April 30.
Individual Tax Slabs
The Indonesian tax system employs progressive tax rates for individuals based on their taxable income:
- Up to IDR 60 million: 5%
- Above IDR 60 million to IDR 250 million: 15%
- Above IDR 250 million to IDR 500 million: 25%
- Above IDR 500 million to IDR 5 billion: 30%
- Above IDR 5 billion: 35%
As of August 7, 2023, the exchange rate is 1 IDR = 0.000066 USD.
Business Income Taxation
Companies operating in Indonesia are subject to a corporate income tax rate of 25% on both domestic and international sourced income. Resident Indonesian companies are required to withhold tax at a rate of 20% for payments to foreign companies.
Corporate Income Tax
Indonesian-registered companies are liable to pay corporate income tax at a rate of 25%. Foreign companies with at least 40% local shareholdings are subject to a reduced rate of 20%. Notably, foreign companies conducting business activities in Indonesia without a physical presence are subject to withholding tax imposed by the paying entity.
However, companies meeting specific criteria receive tax incentives. Companies with gross turnovers below 50 billion IDR have a 50% discount on standard corporate income tax, resulting in a 12.5% rate. Companies with gross turnovers below 4.8 billion IDR pay a minimal amount of 0.5% of total revenue since July 2018.
Value Added Taxation (VAT) / Goods and Services Taxation
Starting from April 1, 2022, the maximum rate for Goods and Services Tax (GST) is 11% at the point of sale. Cottage economies and industries are exempt from sales and services tax. Additionally, a 0% VAT rate applies to the export of taxable goods, intangible taxable goods, and taxable services.
Property Tax, Vehicle Tax, and Carbon Tax
Property tax in Indonesia stands at 10% of the value determined by authorities, which is typically lower than the market value. However, the government has the authority to acquire properties at the same rate, and this decision is not contestable in court.
Vehicle tax is applicable to all vehicle owners, with higher engine capacities resulting in higher taxes. Moreover, a carbon tax is imposed on coal steam power plants, with the rate set based on the carbon market price.
In Indonesia, the taxation system encompasses a wide range of income types, each with specific rules and rates. Below is a breakdown of how different types of income are classified and taxed within the Indonesian taxation framework:
1. Employee’s Income: Employee income includes regular salaries, overtime pay, bonuses, and various allowances (e.g., housing, leave allowances). Benefits in kind are typically taxable for employees. However, certain exceptions exist, such as benefits essential for job execution, government-funded benefits, and certain benefits under specific thresholds. Reimbursements for work-related expenses like conveyance charges and food expenses are not included in taxable income.
2. Equity Income: Equity income refers to the value of shares granted to directors or employees through share option schemes as rewards for services. Such equity income may be subject to regular individual income tax upon encashment.
3. Business Income: Taxable business profits are calculated based on standard accounting principles, with adjustments for tax purposes. Deductions are permitted for all expenses incurred to generate and maintain taxable business profits. Timing differences can arise if expenses recorded as accounting expenses cannot be immediately claimed as tax deductions. Individual taxpayers conducting business activities with an annual turnover below IDR 4.8 billion may use a deemed profit based on a calculation norm provided they notify the Director General Tax (DGT). Certain individuals with business turnover below IDR 4.8 billion are subject to a final tax of 0.5% of turnover, and those within a gross turnover threshold are not subject to income tax for turnover up to IDR 500 million in a fiscal year.
4. Capital Gains: Capital gains are generally taxed at ordinary rates along with other income. However, there are exceptions. Gains from the sale of land, buildings, and exchange-traded shares listed on the Indonesian stock exchange are subject to final tax at the point of sale. Handling capital gains tax requires expert assistance.
5. Dividend Income: Dividends received from Indonesian limited liability companies are subject to final income tax at a rate of 10%. This tax does not apply if the recipient, a domestic individual taxpayer, reinvests the dividends in Indonesia within a specific period. This provision might be applicable for investors who opt for reinvesting mutual fund units.
6. Interest Income: Interest income from time deposits and savings in Indonesian banks or their overseas branches, as well as interest income from time deposits placed through Indonesian branches of foreign banks, is subject to a final income tax rate of 20%. Interest on bonds is subject to final income tax at 10%, collected through withholding. Other investment income is generally taxed at ordinary rates.
7. Rental Income: Income from rentals of land and/or buildings is subject to a final tax rate of 10%. Income from rentals of assets other than land and buildings is subject to a 2% withholding tax, considered as a prepayment for the individual’s total income tax assessment.
Positive Developments in Indonesian Taxation for Taxpayers
In Indonesia, there are notable improvements in the taxation system that offer benefits to taxpayers. Some types of income are even exempt from individual income tax, contributing to a more favorable environment for taxpayers. The exemption criteria encompass specific scenarios and income sources, such as property acquired through gift, gains derived from mutual funds, and profit distributions received by partnership members. Notably, profit distributions within partnerships are exempt since the underlying net income has already been taxed at the entity level, preventing double taxation.
To illustrate the practical aspects of Indonesian taxation, a sample tax return prepared by a prominent Big 4 accounting firm can be explored. A comprehensive example can be found at the following link: Sample Personal Income Tax Calculation. This illustration offers insight into how tax calculations are executed, showcasing various components such as income, deductions, and credits.
As part of its commitment to international taxation norms, Indonesia employs tax credits as part of its system, aligning itself with global practices. This includes the provision of foreign tax relief, which permits individuals to claim a credit for taxes paid or due abroad in connection with foreign-sourced income. To substantiate the tax credit, evidence of tax payment in the foreign jurisdiction needs to be attached to the tax return. This verification process often involves attaching a copy of the foreign tax return.
However, it’s important to note that foreign taxes paid on exempted income items will not be eligible for credit, deduction, or refund in the context of Indonesian tax obligations.
Indonesia’s active participation in international taxation affairs is evident through its engagement in foreign tax treaties. With agreements in place with 71 leading nations globally, Indonesia has established a significant network to facilitate cross-border economic activities. This is particularly significant given Indonesia’s prominent role in various commodity exports.
Turning to the realm of tax payments and administration, both individual and corporate taxpayers are expected to fulfill their obligations on a monthly basis. This entails making deductions and submitting payments to the tax administration, a process that can be completed electronically or through filing monthly tax returns. The precise formats of these forms are readily accessible through the Indonesian tax administration.
Conclusion: Indonesia’s taxation system exhibits a variety of income classifications and exemptions, showcasing the nation’s commitment to modern tax practices. The article underscores the significance of international tax treaties, tax credits, and prudent tax administration. However, readers are advised to verify information and consult professionals for accurate tax compliance. This article is intended for informative purposes and does not constitute legal or financial advice.
Author Bio
