ADB SME
DEVELOPMENT TA
BACKGROUND REPORT
SME CONSTRAINTS IN TAXATION SYSTEM
(SYNOPSIS, FINDINGS, RECOMMENDATIONS)
KAI HAUERSTEIN,
FRANK NIEMANN
MAY 2002
Published by:
ADB Technical Assistance
SME Development
State Ministry for Cooperatives & SME
Jalan H.R. Rasuna Said Kav.3
Jakarta 12940
Tel: ++62 21 520 15 40
Fax: ++62 21 527 94 82
e-mail: management@adbtasme.or.id
ADB
SME DEVELOPMENTTA
I. TABLE OF CONTENTS
I.
TABLE OF CONTENTS ...........................................................................................I
II.
TABLE OF ABBREVIATIONS .............................................................................. IV
III.
TABLE OF FIGURES ............................................................................................. V
IV.
TABLE OF REFERENCES ................................................................................... VI
V.
EXECUTIVE SUMMARY ENGLISH ..................................................................... VII
VI.
EXECUTIVE SUMMARY BAHASA INDONESIA................................................ XIV
1
WHY THIS REPORT IS WRITTEN/ SCOPE OF WORK.........................................1
2
SYNOPSIS OF BUSINESS RELEVANT TAX LAWS IN INDONESIA....................3
2.1
OVERVIEW AND FOCUS ........................................................................................3
2.2
INCOME TAX (REVISED ACCORDING TO LAW NO.17 OF 2000) .......................5
2.2.1
General..................................................................................................................5
2.2.2
Tax subjects ..........................................................................................................6
2.2.3
Tax Objects ...........................................................................................................7
2.2.4
Calculation of Net Income .....................................................................................9
2.2.5
Tax Base .............................................................................................................12
2.2.6
Tax Calculation (Tax rates) .................................................................................13
2.2.7
Withholding Taxes...............................................................................................15
2.3
VALUE ADDED TAX..............................................................................................21
2.3.1
Tax Subject .........................................................................................................21
2.3.2
Tax Object ...........................................................................................................21
2.3.3
Tax Base .............................................................................................................24
2.3.4
Tax Tariff .............................................................................................................24
I
ADB
SME DEVELOPMENTTA
Computing of VAT Liability ..................................................................................25
2.3.5
2.3.5.1
Tax Credit Method ...........................................................................................25
2.3.5.2
Exemptions from final VAT Liabilty ..................................................................25
2.3.6
Procedures ..........................................................................................................26
2.4
SALES TAX ON LUXURY GOODS (SLG) ............................................................27
2.5
TAX OF TRANSFER OF LAND AND BUILDING (TTLB) .....................................29
2.6
GENERAL RULES AND PROCEDURES OF TAXATION.....................................30
2.6.1
Taxpayer’s General Obligations towards Tax Authorities ...................................30
2.6.1.1
Registration Requirements ..............................................................................30
2.6.1.2
Documentation Requirements .........................................................................31
2.6.1.3
Requirements to Self Assessment...................................................................32
2.6.2
Mechanisms of Tax Authorities to Examine Tax Compliance .............................34
2.6.2.1
Verification .......................................................................................................34
2.6.2.2
Audit.................................................................................................................35
2.6.2.3
Investigation.....................................................................................................36
2.6.3
Legal Protection ..................................................................................................36
2.6.4
Summary: penalties, surcharges, interests and fines..........................................37
3
FINDINGS AND ISSUES FOR DISCUSSION.......................................................38
3.1
TAX POLICY ..........................................................................................................38
3.1.1
Exemptions and indirect Incentives for SMEs .....................................................38
3.1.2
Non Existence of SME Definition ........................................................................40
3.1.3
Foreseen direct Tax Incentives often irrelevant for SMEs...................................40
3.1.4
Regional Autonomy .............................................................................................41
3.2
GENERAL OBSERVATIONS ON THE INCOME TAX LAW .................................41
3.3
SPECIFIC OBSERVATION ON INCOME TAX: SME´S OPERATING AS
SOLE TRADERS PAY LESS INCOME TAX THAN CORPORATIONS ...............43
3.4
GENERAL OBSERVATION ON THE VAT AND SALES TAX ON LUXURY
GOODS LAW ........................................................................................................44
3.5
PERCEIVED CORRUPTION ..................................................................................45
II
ADB
SME DEVELOPMENTTA
3.6
LOW TAX COMPLIANCE AND KNOWLEDGE.....................................................45
3.7
OBSERVATIONS ON GENERAL RULES AND PROCEDURES..........................47
4
AGENDA FOR RECOMMENDATIONS ................................................................48
4.1
RECOMMENDATIONS TO PREPARE THE GROUND FOR TAX POLICY
IMPROVEMENTS..................................................................................................48
4.2
RECOMMENDATIONS TO IMPROVE THE IMPACT AND AWARENESS OF
INCOME TAX ........................................................................................................48
4.3
RECOMMENDATIONS TO INCLUDE SME IN THE VAT SYSTEM ......................49
III
ADB
SME DEVELOPMENTTA
II. TABLE OF ABBREVIATIONS
ADB
Asian Development Bank
BPKP
State Audit Authority
CV
Commanditair vennotschap = Limited partnership
DGT
Directorate General for Taxes
GR
Government Regulation
IPEDA
Iuran Pembangunan Daerah = Local Wealth Tax
JDP
Jenderal Directorate Pajak
PND
Perusahan Non Directori
PPh
Pajak Perhasilan = Income Tax Law
PPN
Pajak Pertambahan Nilai Barang
PPnBM
Pajak Penjualan atas Barang Mewah
PT
PerseroanTerbatas = Limited liability company
SME
Small and Medium Enterprise
TA
Technical Assistance
TKUdTCP
Tentang Kententuan Umum Dan Tata Cara Perpajakan = Law
on General Rules and Procedures of Taxation
URT
Usaha Rumah Tangga
UU
Undang Undang = Law
VAT
Value Added Tax
IV
ADB
SME DEVELOPMENTTA
III. TABLE OF FIGURES
Figure 1:
Depreciation methods and rates according to Article 11 PPh......................10
Figure 2:
Tax Tariffs Before and After the 2000 Tax Reform ......................................13
Figure 3:
Income Tax Payable by Individual Tax Payers, Before and After the Tax
Reform 2000 .................................................................................................14
Figure 4:
Income Tax Payable by Corporate Tax Payers, Before and After the Tax
Reform 2000 ................................................................................................15
Figure 5:
Overview Withholding Taxes........................................................................18
Figure 6:
Other services subject to PPH 23 Withholding Tax and their respective
Tax Rates ....................................................................................................20
Figure 7:
Examples of VAT exempted goods/services................................................22
Figure 8:
Luxury Tax on Goods...................................................................................28
Figure 9:
Exemptions / Incentives ...............................................................................38
Figure 10:
Comparison income tax tariffs between Sole Trader and corporations ......43
Figure 11:
Tax Compliance according to ADB TA Survey ............................................45
Figure 12:
Income Tax Forms received between 1995-1997 ......................................46
V
ADB
SME DEVELOPMENTTA
IV. TABLE OF REFERENCES
Author
Title
Anonymous
Home page Directorate Genderal for Taxes (DGT) in the Ministry
of Finance, http://www.pajak.go.id/profil/grafik_statistik
Anonymous
1996 Economic Census, Profile of Establishment with Legal Entity, Badan Pusat Statistic, Jakarta, 1996
Anonymous
Profil Usaha Kecil dan Menengah Tidak Berbadan Hukum,
Badan Pusat Statisitk, Jakarta, 1999
Anonymous
Tax Flash Vol. 04/2002, Vol.03/2002, Vol.02/2002, Vol. 08/2001,
Vol. 07/2001, Vol 06/2001, Vol. 04/200, Vol. 13/2000, Price
Waterhouse Coopers, Dr. Hadi Sutanto & Rekan, Jakarta, 2000,
2001, 2002.
Harvey Galper and Investment Tax Incentives: Recent Indonesian Experience and
Geoffry Walton, Bar- Options for Reform http://www.barents fiscal.or.id.
ents Group
J.S. Uppal
Taxation in Indonesia, Gadjah Mada University Press, 2000
VI
ADB
SME DEVELOPMENTTA
V. EXECUTIVE SUMMARY ENGLISH
The specific impact of Taxation Laws on SME requires Policy Makers to take different
view. Therefore, a review of SME relevant (national) Tax Laws and Regulations as well as
the findings and recommendations to improve the SME friendliness of the taxation system
are set out in this report.
¾ Taxation System (Legislation and Administration) often hampers SME growth or forces
them into the informal sector. Laws an regulations (legislation) effects on the cash flow
through tax payments but also cause high compliance costs through formal and administrative standards like book-keeping requirements, tax self assessment, and penalities. Often do those constraints not only relate to tax laws but also to bureaucratic
behavior (administration). The interaction with bureaucracy is often encountered with
bribes, lengthy procedures and in-transparency.
¾ Focus of the report is the National Taxation System, covering Income Tax, Value
Added Tax, Sales Tax on Luxury Goods, Tax on Transfer of Land and Building, and
the Law on General Rules and Procedures of Taxation. Even though becoming increasingly important province and district taxes are not part of this report as well as
custom taxes, retributions, and contributions.
¾ National Tax Policy in Indonesia has undergone radical changes with three major tax
reforms in the last eighteen years. The latest, in the year 2000, significantly streamlined tax regulations and has reduced the average income tax burden for most SMEs
Considering numerous exemptions for SMEs, indirect incentives, and the general
availability of facilities creation of (additional) SME specific tax incentives is not required.
¾ Even though promising attempts have been undertaken to reduce formal requirements
as well as administrative burden the overall tax environment is still SME unfriendly last
but not least due to legal uncertainty and corrupt tax authorities.
Income Tax
¾ In material terms the 2000 Income Tax Reform introduced a new tax rate structure
reducing the tax burden for most SME. The main features of the new structure are (i)
introducing separate tax tariffs for individual and corporate taxpayers, (ii) reducing tax
rates for lower income brackets, (iii) increasing the top tax rate for individual taxpayers
from 30% to 35%. In combination with the increase in tax free allowances for individual
taxpayers, the reform has significantly reduced the tax burden of low and middleincome taxpayers.
VII
ADB
Progression Zone (Taxable
Income in Million Rp.)
0-25
25-50
50-100
100-200
over 200
Tax free allowances
Taxpayer
Spouse with own income
Spouse without own income
Each other dependant (max. 3)
Maximum Tax Free Allowance
(2 earners, 3 dependants)
Tax Rate Until 2000
Individual and Corporate Taxpayers
5%
15%
30%
Rp. 1,728,000
Rp. 1,728,000
Rp 864,000
Rp 864,000
SME DEVELOPMENTTA
Tax Rate from 2001
Individual
Corporate
Taxpayer
Taxpayer
5%
10%
10%
15%
15%
25%
30%
35%
Rp. 2,880,000
Rp. 2,880,000
Rp. 1,440,000
Rp. 1,440,000
Rp. 6,048,000 Rp. 10,080,000
¾ The 2000 Tax Reform did not substantially alter the legal base for tax withholding
and external collection. However, some withholding tax rates were increased, most
relevant for SME increasing the final withholding tax rate on interest income from
deposits and savings from 15% to 20%; increasing the final withholding tax rate on
Rentals of Land and/or Buildings from 6% to 10%, withdrawing/ limiting the final tax
of 4% on consulting income and increasing the effective withholding tax rate ( now
creditable) on fees for professional services, including legal, tax, technical and
management consultancy, from 6% to 7,5% of gross income; introducing a new withholding tax for construction services.
Value Added Tax/ Sales Tax on Luxury Goods
¾ The 2000 Tax Reform increased the threshold for those small sized companies, which
can opt to be exempted from Value Added Tax from Rp 24.000.000,00 to
360,000,000.00 (goods) and 180,000,000.00 (services) and reduced the scope of VAT
exempted goods and services. However numerous exemptions remain with regards to
tax objects and tariffs and tax liability.
¾ Major improvements of the formal requirements have been encountered. Under the
new law all taxable enterprises can claim monthly refunds whenever (creditable inputs
for a month exceed outputs). If the taxpayer satisfies certain criteria, the refund process may be even granted within seven days by making advance refund payments, i.e.
prior to tax audit. Tax Reform 2000 newly provides that Commercial invoice can be
used as a standard tax invoice provided sufficient detail is provided:
¾ Tax Reform 2000 broadens the range of tariff for the Sales Tax on Luxury Goods as
well as increased the rate applicable to many types of goods.
Tax of Transfer of Land and Building
¾ Tax of Transfer of Land and Building was introduced in 1997. Before, only the income
from the transfer of land and building was taxed (5% final withholding tax on the transfer value). Now, both Income Tax and Transfer of Land and Building Tax are cumulatively due. The “new “ Law on Tax of Transfer of Land and Building (Law No. 20/2000)
imposes an additional tax only on transfer of the title. To reduce the tax burden for
lower income class the law provides exemptions, discounts, and reduction from tax liability
VIII
ADB
SME DEVELOPMENTTA
General Rules and Procedures of Taxation
¾ Formal requirements set out in the General Rules and Procedures of Taxation (often
specified in the respective tax laws) are often overly complicated and business unfriendly. These obligations range from requirements to (i) register, (ii) keep proper
documentation (books and records, (iii) to self-assess the tax liability. The selfassessments of tax liability include requirements to file a tax returns, compute own tax
liability, perform down payments.
¾ Tax Reform 2000 eased on the one hand the administrative burden by introducing the
possibility of simplified tax forms, exemptions to perform monthly instalment payments,
and advance refund payments, i.e. without an obligatory audit. On the other hand imposes heavy administrative fines or criminal charges on those, who do not comply,
especially for those who fail to register. As a rule the reclaim of tax is only possible after a mandatory audit has been conducted (exception see above), thus torpedoing the
self-assessment scheme and increasing the interference with tax authorities.
IX
ADB
SME DEVELOPMENTTA
Findings
¾ The SME Sector can draw on numerous exemptions/ indirect incentives. After the review of the Taxation System it seems that small/ medium sector .is part of an overall
tax policy, which aims to reduce their burden through indirect incentives and exemptions. An overview of these exemptions/incentives is illustrated in the table below.
Exemptions/ Incentives
Regulation
SME Eligibility
Annual gross turnover
less than
Rp.600,000,000
SME Classification
Exemptions from keep- Art, 14 (2), PPH, Art
ing books and accounts 28 (2) KUdTCP
Annual gross turnover
less than
Rp.600,000,000
SME Classification
Exemption from filing
Tax Returns
Decree Minister of
Finance
535/KMK.04/2000
If net-income is not
SMEs with losses
more than non-taxable
in start-up phase
income set forth in Art. 7
PPH
Exemptions from VAT
liability
Art 1, Decree Minister Have to opt
of Finance, No
Goods:
552/KMK.04/2000
gross turnover not exceeding 360,000,000
Simplification calculating Net Income by using Net Calculation
Norm
Art 5 (1)a PPH, Art
28 (2), KUdTCP
Requirement
SME Classification
Services:
gross turnover not exceeding 180,000,000
SME Classification
Reduced Income Tax
Rate from Income received from the sale of
participation/ shares in
SMEs
Art 4 (2)k PPH Decree of Minister of
Finance
250/KMK.04/1995)
Net sales
Venture
not more
Capital
Company than Rp. 5
million
Joint
Venture
with SME
in specific
sectors
Not
traded in
stock exchange
Final Tax Regime for
construction remains
for “Small Construction
Companies”
GR No 140/2000
SME Classification
Contract of not more
than Rp. 1 billion + certifies as SME
Reduced tax burden
through higher tax free
allowance
Art 7 PPH
Individual Tax Payer
SME as Sole
Trader
Reduced tax burden
through new Progression
Art 17 PPH
Individual Tax Payer
SME as Sole
Trader
(SME entrepreneur certificat)
X
ADB
Exemptions/ Incentives
Regulation
GR 4, 1995
Reduced Income
(Withholding) Tax Tariff
for the income received
from the transfer of
capital participation
SME DEVELOPMENTTA
Requirement
Venture Capital Company
Joint Venture with SME
in specific sectors
SME Eligibility
Net sales not more
than Rp. 5 million,
Decree of Minister
of Finance
250/KMK.04/1995)
Not traded in stock exchange
No Income Tax due for
income from dividends
Art 4 (3) PPH
Dividends received from Net sales not more
investment in joint ven- than Rp. 5 million,
ture with SME
Decree of Minister
of Finance
250/KMK.04/1995)
¾ Non Existence of SME Definition- The table above shows that the varying definitions
create confusion who should benefit from the simplifications, exemptions, and incentives. As a consequence SME policy may not reach the desired target group.
¾ Foreseen direct tax incentives in the Tax System are often irrelevant for SMEs as their
focus are certain business sectors and/or promoted areas.
¾ Withholding Taxes and obligatory audits are torpedoing the (best practice) selfassessment scheme, thus increasing interaction with government and tax collectors
causing bureaucratic hassle, official harassment and corruption.
¾ SME operating as sole traders are paying less Income Tax than corporations and less
than before Tax Reform 2000.
¾ VAT exemptions may cause disadvantages for sub-contractors (linkages) and are an
disincentive to conduct proper books.
¾ VAT Law discourages SME to opt for VAT liability as no further SME tailored simplifications for entering the VAT system are provided.
¾ Lengthy and burdensome refund procedures are discouraging SME to enter the VAT
System.
¾ The Sales Tax on Luxury Goods discriminates specific sectors without considering exemptions for small and medium sized enterprises.
¾ SME have to comply with complex and complicated requirements set out in various
tax laws, which include: registration requirements, documentation requirements, and
self-assessments requirements. These requirements are often coupled with high
criminal charges making SME vulnerable for predatory tax officials.
¾ Indonesia strives to enhance tax compliance among SME. However, in this process
adequate balances have to be found between public interest to reduce tax evasion
and the need for simple formal requirements in order not to place undue administrative
and economic requirements on SME.
¾ According to a quantitative survey, conducted by the ADB TA SME Development, tax
compliance and knowledge among SME is relatively low.
XI
ADB
SME DEVELOPMENTTA
Recommendations
¾ Tax procedures as well as the overall administrative climate still require a thorough
review. Establish a working group to review the tax regulations and procedures on
SME with specific attention towards further simplification of administrative & formal requirements. Under participation of private stakeholders ( small and medium businesses, pressure groups, tax consultants) initiate further studies with regards to the
specific tax perception of SMEs e.g. corruption, tax compliance, tax knowledge, and
further hampering tax regulations.
¾ Regional autonomy has increased the taxation rights of local Governments. Therefore,
the impact of local taxes requires a in depth review/ assessment. Attention should be
further given to the potential to harmonize, as far as possible, administrative procedures, judicial supervision, and formal requirements (e.g. recording duties, calculation
of tax base).
¾ Indonesia strives to enhance tax compliance among SME. In order to improve tax
compliance and bring SME back into the formal sector initiate an awareness campaign
among SME to provide information on the taxation system. A user-friendly information
package published in Indonesian could inform about business taxation and thus raise
the understanding about the taxation system and procedures.
¾ Indonesia still lacks a SME definition, not only in the taxation system. A unified SME
definition is essential to achieve a focused SME tax policy for all taxes.
¾ The withholding schemes, obligatory audits for tax refunds, and lengthy tax refund
procedures have a negative impact on a –in principle- well balanced tax system. In
general withholding schemes should be reduced and the obligatory audit be replaced
by a modified verification and reconsidered as an exemption rather than a rule. As a
first step small corporations should be exempted from withholding requirements and
those withholding schemes, which have a negative impact on sub-contracting are to
be replaced by the self-assessment scheme.
¾ The awareness of the positive effects triggered by the Income Tax Reform has not
been sufficiently enhanced. Government should make use of this positive image and
send out the message that SME are the winners of the Income Tax Reform by significantly reducing their tax burden, granting them new indirect tax incentives, as well as
exemptions and simplifications. It is therefore recommended to advocate this positive
impact on SME.
¾ Reconsider the general view on the practice to install monthly down payments even
though tax payers are materially not liable to pay Income Tax. A shift in this practice
would help to reduce the negative impact on the cash flow, especially for SME.
¾ Currently, the majority or SME are heavily criminalized merely they do not register. To
build a golden bridge to the formal sector amnesty rules for those, which did not comply with registration requirements because of lack of information or knowledge should
be provided. Further, it is recommended to generally exclude those in the low income
strata (yearly gross income of not more than Rp. 50.000.000) from all tax requirements, also the requirement to register.
¾ Transactions of a VAT exempted company could be generally rated zero per cent (instead of being tax exempt). As another option the non-collection of VAT is recommended. As a consequence VAT is not imposed on the transaction, while small companies are still allowed to credit the input tax. This in turn would create an incentive to
comply with tax regulations, conducting books etc., as well as creating an incentive for
a higher request for tax consulting services.
XII
ADB
SME DEVELOPMENTTA
¾ Small enterprises could be exempted from Sales Tax purchasing one computer for
business purposes.
XIII
ADB
SME DEVELOPMENTTA
VI. EXECUTIVE SUMMARY BAHASA INDONESIA
Dampak khusus Undang-undang Perpajakan bagi UKM mendorong para Pembuat Kebijakan untuk merubah sudut pandang. Oleh karena itu laporan ini menjabarkan pengkajian
Undang-undang dan Peraturan Perpajakan (nasional) yang relevan dengan UKM maupun
temuan dan me-rekomendasi suatu sistim perpajakan untuk meningkatkan ke-akraban
perpajakan kepada UKM.
¾ Sistim Perpajakan (Legislasi dan Administrasi) seringkali menghambat pertumbuhan
UKM atau memaksa mereka ke sektor informal. Undang-undang dan peraturan (legislasi) mempunyai dampak terhadap alur kas akibat pembayaran pajak akan tetapi juga
menyebabkan biaya tinggi untuk memenuhi persyaratan (high compliance costs) melalui standardidasi administrasi yang resmi seperti kewajiban memelihara pembukuan
yang rapi, menilai-sendiri pajak (tax self assessment) dan denda. Seringkali hambatan-hambatan tersebut bukan saja terkait dengan undang-undang perpajakan tetapi
juga akibat perilaku birokrasi. Interaksi dengan birokrasi seringkali berbentuk penyuapan, prosedur berbelit dan proses yang tidak transparen.
¾ Fokus laporan ini ialah pada Sistem Perpajakan Nasional, meliputi Pajak Pendapatan,
Pajak Pertambahan Nilai, Pajak Penjualan Barang Mewah, Pajak Penjualan Bumi dan
Bangunan, dan Undang-undang tentang Peraturan Umum dan Prosedur Perpajakan.
Walaupun merupakan hal yang makin penting, pajak provinsi dan kabupaten maupun
bea-cukai, retribusi dan kontribusi tidak merupakan bagian dari laporan ini.
¾ Dalam delapanbelas tahun terakhir Kebijakan Perpajakan Nasional di Indonesia telah
mengalami perubahan radikal dengan tiga reformasi besar. Kebijakan terakhir, dalam
tahun 2000, ialah membuat penyempurnaan peraturan pajak yang signifikan sehingga
pada umumnya mengurangi beban pajak pendapatan UKM rata-rata. Dengan mempertimbangkan sejumlah besar pembebasan bagi UKM, insentif tidak-langsung, dan
fasilitas umum yang sudah tersedia maka tidak diperlukan lagi menciptakan (tambahan) insentif perpajakan bagi UKM.
¾ Walaupun telah di-upayakan keras untuk mengurangi persyaratan resmi maupun beban administratif, lingkungan umum perpajakan masih saja kurang-akrab terhadap
UKM dan yang tidak kalah penting, ialah akibat ketidak-pastian hukum dan perilaku
pejabat-pejabat yang korup.
Pajak Pendapatan
¾ Dari segi materi, Reformasi Pajak Pendapatan tahun 2000 memperkenalkan suatu
struktur tarip pajak baru yang mengurangi beban pajak bagi sejumlah besar UKM. Ciri
utama struktur baru ialah (i) memilah tarip pajak antara wajib pajak perorangan dan
badan; (ii) mengurangi beban pajak bagi golongan berpenghasilan rendah, (iii)
menaikkan tingkat pajak bagi wajib pajak golongan atas dari 30% hingga 35%. Dengan kombinasi kenaikan pembebasan pajak bagi wajib pajak perorangan, maka reformasi telah mengurangi secara signifikan beban pajak golongan wajib pajak berpenghasilan rendah dan menengah.
XIV
ADB
Pajak Progresif (Pendapatan
Kena Pajak – Rp.juta.)
0-25
25-50
50-100
100-200
Diatas 200
Pembebasan Pajak
Wajib Pajak
Isteri dengan penghasilan
Isteri tanpa penghasilan
Tanggungan (max. 3)
Pembebasan Pajak max. (2
bekerja, 3 tanggungan)
Tarip Pajak hingga
2000
Wajib Pajak Perorangan dan Badan
5%
15%
30%
SME DEVELOPMENTTA
Tarip Pajak mulai 2001
Wajib Pajak
Perorangan
5%
10%
15%
25%
35%
Rp. 1,728,000
Rp. 1,728,000
Rp 864,000
Rp 864,000
Rp. 2,880,000
Rp. 2,880,000
Rp. 1,440,000
Rp. 1,440,000
Rp. 6,048,000
Rp. 10,080,000
Wajib Pajak
Badan
10%
15%
30%
¾ Secara substansial Reformasi Pajak tahun 2000 tidak merubah dasar hukum pajak
pemotongan/pemungutan (withholding tax) dan pemungutan external. Namun
demikian, beberapa tarip pajak pemotongan/pemungutan dinaikkan, yang paling relevan dengan UKM ialah kenaikan tarip pajak pemotongan/pemungutan final pendapatan bunga dari deposit dan tabungan dari 15% hingga 20%; kenaikan tarip pajak
pemotongan final dari Penyewaan Tanah dan/atau Gedung dari 6% hingga 10%;
pencabutan / pembatasan pajak final 4% dari pendapatan konsultan dan kenaikan
tarip pajak pemotongan efektif (sekarang dapat di-kredit kembali) terhadap penghasilan jasa-jasa professional, termasuk konsultansi hukum, pajak, teknis dan manajemen, dari 6% hingga 7,5% dari pendapatan kotor; dan pajak pemotongan baru jasajasa konstruksi.
Pajak Pertambahan Nilai / Pajak Penjualan Barang Mewah
¾ Reformasi Pajak tahun 2000 menaikkan ambang batas bagi perusahaan kecil sehingga dapat memilih pembebasan dari Pajak Pertambahan Nilai mulai Rp 24.000.000
hingga Rp.360,000,000 (barang) dan Rp.180,000,000 (jasa-jasa) dan mengurangi
cakupan PPN barang dan jasa-jasa. Namun demikian masih terdapat sejumlah besar
pembebasan yang berkaitan dengan obyek pajak, tarip pajak serta kewajiban pajak.
¾ Terdapat sejumlah besar perbaikan dalam persyaratan resmi perpajakan. Dalam undang-undang pajak yang baru semua wajib pajak badan dapat klaim pengembalian
setiap bulan apabila pemasukan kredit melampaui pengeluaran dalam sebulan. Apabila wajib pajak memenuhi beberapa criteria tertentu, proses pengembalian mungkin
dapat disetujui dalam waktu tujuh hari dengan pembayaran dimuka, yaitu sebelum
audit pajak. Reformasi Pajak tahun 2000 menyebutkan bahwa Invoice komersial dapat
dipakai sebagai standard invoice pajak apabila memuat cukup perincian.
¾ Reformasi Pajak tahun 2000 memperlebar jenjang tarip bagi Pajak Penjualan Barang
Mewah maupun meningkatkan tarip yang berlaku bagi banyak ragam barang.
Pajak Penjualan Bumi dan Bangunan
¾ Pajak Penjualan Bumi dan Bangunan dimulai dalam tahun 1997. Sebelumnya, hanya
pendapatan atas penjualan bumi dan bangunan dibebankan pajak (pajak pemotongan
final 5% atas nilai jual). Saat ini, baik Pajak Pendapatan maupun Pajak Penjualan
Bumi dan Bangunan secara kumulatif harus dibayar. Undang-undang Pajak Penjualan
Bumi dan Bangunan “baru” (UU No. 20/2000) hanya menambahkan pajak atas balik
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nama. Untuk mengurangi beban pajak bagi golongan berpenghasilan rendah undangundang memberikan pembebasan, diskon, dan pengurangan kewajiban pajak.
Peraturan Umum dan Prosedur Perpajakan
¾ Persyaratan formal yang ditetapkan dalam Peraturan Umum dan Prosedur Perpajakan
(diperinci dalam undang-undang pajak yang bersangkutan) seringkali terlalu rumit dan
kurang akrab bagi bisnis. Kewajiban ini terentang dari persyaratan untuk (i) mendaftar,
(ii) membuat dokumentasi yang wajar (pembukuan dan catatan), (iii) untuk membuat
penilaian sendiri atas kewajiban membayar pajak. Penilaian sendiri kewajiban membayar pajak termasuk kewajiban mengisi surat pernyataan pajak, menghitung sendiri
kewajiban membayar pajak, dan membayar pajak.
¾ Reformasi Pajak tahun 2000 disatu fihak mengurangi beban administratif dengan
memberi kemungkinan penyederhanaan format pajak, pembebasan membayar cicilan
pajak bulanan, dan pembayaran pengembalian dimuka, yaitu tanpa wajib-audit. Difihak lain, menerbitkan denda administratif berat atau tuntutan pidana terhadap mereka
yang tidak memenuhi kewajibannya, terutama bagi mereka yang tidak mendaftarkan
diri. Secara umum, klaim pajak hanya mungkin dilakukan setelah dilakukan audit-wajib
(lihat pengecualian diatas), dan dengan demikian meniadakan skema penilaian sendiri
dan meningkatkan intervensi otoritas perpajakan.
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Temuan
¾ Bagi sector UKM terdapat sejumlah besar pembebasan / insetif tidak-langsung. Setelah pengkajian-ulang Sistim Perpajakan, tampak bahwa sektor kecil-menengah merupakan bagian dari suatu kebijakan perpajakan umum yang bermaksud mengurangi
beban mereka melalui insetif tidak-langsung dan pembebasan. Suatu risalah pembebasan / insentif dijabarkan dibawah ini.
Pembebasan/ Insentif
Peraturan
Persyaratan
Perysaratan
UKM
Omzet tahunan kurang
Penyederhanaan perhi- Ayat 5 (1)a PPH,
tungan Pendapatan Net Ayat 28 (2), KUdTCP dari Rp.600,000,000
dengan Norma Perhitungan Net
Klasifikasi UKM
Pembebasan membuat
pembukuan dan catatan
Ayat 14 (2), PPH,
Ayat 28 (2) KUdTCP
Omzet tahunan kurang
dari Rp.600,000,000
Klasifikasi UKM
Pembebasan mengisi
SPT
Keputusan Menkeu
535/KMK.04/2000
UKM dengan
Bila penghasilan net
kerugian saat mutidak melampaui
penghasilan tidak-kena lai bisnis
pajak sesuai Art. 7 PPH
Pembebasan dari kewajiban PPN
Ayat 1, Keputusan
Menkeu No.
552/KMK.04/2000
Dapat memilih
Klasifikasi UKM
Barang:
omzet gross tidak
melampaui 360,000,000
Jasa-jasa:
omzet gross tidak
melampaui 180,000,000
Pengurangan Tarip Pa- Ayat 4 (2)k PPH
Keputusan Menkeu
jak Pendapatan yang
diterima dari penjualan 250/KMK.04/1995)
partisipasi / saham di
UKM
Perhitungajn Pajak Final untuk konstruksi
bagi “Usaha Kecil Konstruksi”
PP No 140/2000
Kontrak kurang dari Rp.
1 milyar + kwalifikasi
sebagai UKM
Klasifikasi UKM
(Sertifikasi UKM)
Ayat 7 PPH
Pengurangan beban
pajak melalui peningkatan pembebasan pajak
Pengurangan beban
pajak melalui tarip Pajak Progres baru
Perusahaan Penjualan Klasifikasi UKM
Modal Ven- Net tidak
melamtura
paui Rp. 5
Joint Venjuta
ture dengan
UKM di sektor spesifik
Tidak
diperdagangkan di
bursa effek
Ayat 17 PPH
Wajib Pajak Perorangan UKM sebagai
Pedagang
Wajib Pajak Perorangan UKM sebagai
Pedagang
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Pembebasan/ Insentif
Pengurangan Penghasilan (Pemotongan)
Tarip Pajak bagi
penghasilan dari transfer partisipasi modal
Peraturan
PP 4, 1995
SME DEVELOPMENTTA
Persyaratan
Persyaratan
UKM
Perusahaan Modal Ven- Penjualan Net
kurang dari Rp. 5
tura
juta. Keputusan
Joint Venture dengan
Menkeu No.
UKM dalam sektor spe250/KMK.04/1995)
sifik
Tidak diperdagangkan
di bursa efek
Tidak ada kewajiban
Pajak Pendapatan dari
dividend
Ayat 4 (3) PPH
Dividend diterima dari
investasi dalam joint
venture dengan UKM
Penjualan Net
kurang dari Rp. 5
juta. Keputusan
Menkeu No.
250/KMK.04/1995)
¾ Tidak ada Definisi UKM. Tabel diatas menunjukkan bahwa berbagai definisi menciptakan kebingungan siapa yang akan menikmati penyederhanaan, pembebasan, dan insentif. Akibatnya kebijakan UKM mungkin tidak akan mencapai kelompok sasaran
yang diinginkan.
¾ Insentif pajak langsung dalam Sistim Perpajakan seringkali tidak relevan bagi UKM
karena fokus terhadap beberapa sektor bisnis dan/atau bidang yang di-promosikan.
¾ Pajak pemotongan/pemungutan dan wajib-audit meniadakan (praktik terbaik) skema
menilai-sendiri, dengan demikian meningkatkan interaksi dengan pejabat pemerintah
dan pemungut pajak dengan akibat pertengkaran dengan birokrasi, campur-tangan
resmi dan korupsi.
¾ UKM sebagai pedagang murni membayar lebih sedikit Pajak Pendapatan daripada
perusahaan besar dan sebelum Reformasi Pajak tahun 2000.
¾ Pembebasan PPN dapat mengakibatkan kerugian bagi sub-contractor (hubungan jaringan bisnis) dan tidak merupakan insentif untuk membuat pembukuan yang baik.
¾ Undang-undang PPN tidak mendorong UKM untuk memilih kewajiban PPN karena
tidak ada penyederhanaan yang cocok bagi UKM dalam sistim PPN.
¾ Prosedur pengembalian pajak yang panjang dan melelahkan tidak mendorong UKM
untuk masuk dalam sistim PPN.
¾ Pajak Penjualan Barang Mewah membuat diskriminasi beberapa sektor tanpa mempertinbangkan pembebasan bagi Usaha Kecil dan Menegah.
¾ UKM harus memenuhi persyaratan yang berbelit dan rumit dalam berbagai undangundang perpajakan, termasuk: persyaratan pendaftaran, persyaratan dokumentasi,
dan persyaratan penilaian sendiri. Persyaratan ini seringkali terkait dengan sanksi pidana berat sehingga UKM dapat menjadi mangsa yang empuk bagi pejabat perpajakan yang ganas.
¾ Indonesia berusaha keras untuk meningkatkan kewajiban pajak diantara UKM. Namun
demikian, dalam proses ini perlu dicari keseimbangan yang wajar antara kepentingan
publik untuk mengurangi usaha menghindari pajak dan kebutuhan persyaratan yang
sederhana untuk mengurangi beban administratif dan kewajiban ekonomi bagi UKM.
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¾ Menurut hasil suatu survey kuantitatif yang dibuat oleh ADB TA SME Development,
pengetahuan dan kewajiban pajak diantara UKM relatif rendah.
Rekomendasi
¾ Prosedur perpajakan maupun iklim umum administratif masih memerlukan pengkajian
yang mendalam. Disarankan untuk membuat suatu kelompok-kerja untuk mengkajiulang peraturan dan prosedur perpajakan bagi UKM dengan perhatian khusus terhadap penyederhanaan persyaratan administratif & formal yang berlanjut. Dengan partisipasi stakeholders swasta (bisnis kecil dan menengah, pressure groups, konsultan
pajak) dimulai membuat studi lebih lanjut tentang persepsi pajak khusus bagi UKM,
misalnya korupsi, kewajiban pajak, pengetahuan perpajakan, dan hambatanhambatan peraturan perpajakan.
¾ Otonomi regional telah meningkatkan hak perpajakan pemerintah daerah. Oleh
karena itu dampak pajak lokal memerlukan pengkajian mendalam / penilaian. Selanjutnya perlu memperhatikan potensi harmonisasi, sejauh mungkin, prosedur administratif, supervisi peradilan, dan persyaratan formal (mis., kewajiban pencatatan, menghitung dasar pajak, dsbnya).
¾ Indonesia berusaha keras untuk meningkatkan ketaatan pajak diantara UKM. Untuk
meningkatkan keataatan pajak dan membawa UKM kembali ke sector formal seyogyanya dimulai dengan suatu kampanye kesadaran untuk menyediakann informasi tentang sistim perpajakan diantara UKM. Seyogyanya dibuat suatu perangkat informasi
yang akrab UKM yang memuat informasi perpajakan bisnis dan dengan demikian dapat meningkatkan pemahaman tentang sistim dan prosedur perpajakan.
¾ Indonesia belum memiliki suatu definisi UKM, bukan hanya dalam sistim perpajakan.
Suatu kesatuan pemahaman definisi UKM sangat penting untuk membuat suatu kebijakan UKM yang focus dalam semua hal perpajakan.
¾ Skema pajak pemotongan/pemungutan, wajib-audit untuk pengembalian pajak, dan
prosedur pengembalian pajak yang berbelit mempunyai dampak negatif – secara prinsipiil – terhadap sistim perpajakan yang berimbang. Secara umum skema pemotongan/pemungutan seyogyanya dikurangi dan wajib-audit diganti dengan suatu modifikasi verifikasi dan dipertimbangkan kembali sebagai suatu pembebasan ketimbang
suatu peraturan tetap. Sebagai suatu langkah awal, usaha kecil seyogyanya dibebaskan dari persyaratan pemotongan/pemungutan dan skema pemotongan yang mempunyai dampak negatif terhadap sub-kontrakting sebaiknya diganti dengan skema
penilaian sendiri.
¾ Kesadaran dampak positif yang diperoleh dari Reformasi Pajak Pendapatan belum
cukup ditingkatkan. Pemerintah seyogyanya memanfaatkan citra positif ini dan menyebar berita bahwa UKM mendapatkan manfaat dari Reformasi Pajak Pendapatan secara signifikan dengan mengurangi beban pajak mereka, memberikan insentif pajak
tidak-langsung yang baru, maupun pembebasan dan penyederhanaan. Oleh karena
itu disarankan untuk membuat advokasi dampak positif tersebut bagi UKM.
¾ Mempertimbangkan kembali pandangan umum mengenai praktik pembayaran cicilan
pajak bulanan walaupun wajib-pajak secara material tidak wajib membayar Pajak
Pendapatan. Suatu perubahan dalam praktik ini akan membantu mengurangi dampak
negatif pada alur kas, utamanya bagi UKM.
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¾ Saat ini, sebagian besar UKM didenda berat hanya karena tidak mendaftarkan diri.
Untuk membangun sebuah jembatan emas menuju sector formal, seyogyanya dibuat
peraturan pengampunan bagi mereka yang tidak memenuhi persyaratan pendaftaran
karena tidak ada informasi atau pengetahuan tentang perpajakan. Selanjutnya disarankan untuk mengecualikan golongan strata berpenghasilan rendah (penghasilan
kotor setahun kurang dari Rp. 50.000.000) dari semua persyaratan perpajakan termasuk kewajiban mendaftarkan diri.
¾ Perusahaan yang dibebaskan dari PPN seyogyanya diberi klasifikasi nol percent
(ketimbang dibebaskan dari pajak). Sebagai alternatif lain maka disarankan untuk tidak memungut PPN. Akibatnya PPN tidak dibebankan pada transaksi sedangkan
usaha kecil masih di-izinkan untuk membuat kredit atas pajak masukan. Dengan
demikian hal ini akan menciptakan insentif agar memenuhi kewajiban perpajakan,
membuat pembukuan, dsbnya, maupun penciptaan insentif untuk meningkatkan permintaan terhadap jasa konsultansi perpajakan.
¾ Usaha kecil dapat dibebaskan dari Pajak Penjualan apabila membeli sebuah komputer untuk penggunaan dalam bisnis.
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1 WHY THIS REPORT IS WRITTEN / SCOPE OF WORK
This report as one output of the ADB SME Development Project aims at supporting the
Indonesian inter-ministerial SME development task force in formulating a medium-term
SME development strategy that is in line with the country's overall reform program and
stabilization efforts. One focus of attention is creating a conducive taxation environment
for SME and SME development policies. In more detail, the purpose of the report is to
propose an agenda to the Indonesian Government for enhancing a business
friendly taxation system. Its recommendations will be reflected in a revised MediumTerm Action Plan for the Development of SMEs as it merges Objective 1 in Annex D with
Annex A of the Medium Term Action Plan.
As a Final Report it further meets the requirements of Output 1.6 to be delivered by the TA
(Working Group SME Environment) “Existing tax system is assessed with regard to SME
relevant taxation and strategies for SME friendly taxation are developed”.
The actual scope of work reflected in this report is the result of two refinements, which
have been agreed upon with the Task Force.
1st Refinement: As Annex D of the Mid Term Action Plan still focuses on actions introducing new tax incentives it was agreed to translate and merge tax related actions into the
SME Environment Action Plan under Objective 2- Improve, simplify and streamline
laws and regulations and here under Action 2.5: Review of Tax Laws and their Enforcements with regards to their impact on SME.
2nd Refinement: The ADB-TA together with the Taskforce decided to give the taxation
issue a lower priority taking into consideration the intensive and well-founded reform work
currently carried out by the Ministry of Finance with USAID assistance. As a result this report will include three outputs, namely (i) information on SMEs perception of taxation laws
and practice as a result from the TA's conducted quantitative survey, (ii) preparation of a
synopsis of SME-specific tax regulations in Indonesia, (iii) elaboration of specific SME
constraints/ incentives with regards to general impact of tax laws, the Income Tax Law,
the Value Added Tax and the enforcements of those laws. The results with main aspects
for consideration will be submitted to the Task Force and the USAID project, which is
working on the revision of the taxation system. This project, located in the Ministry of Finance, aims at supporting Indonesian tax reform and simplification and has, a/o, already
compiled an extensive tax expenditure report listing most tax exemptions in main national
taxes, as well as commenced work on regional taxation issues.
To meet the before mentioned requirements this report supplies a synopsis of Indonesian
Taxation System (national) taking into account the Tax Reform 2000 (Chapter 2) as well
as the relevance for SMEs. Based on an assessment findings are developed for further
discussion (Chapter 3). The findings will than be then translated in recommendations,
which are reflected in Chapter 4.
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Taxation System often hampers SME growth or forces them into the informal
sector
Taxation can effect a business on various levels, i.e. it can have effects on (i) cash flow
(through tax payments), (ii) business decisions (evaluation which decision is most beneficial to save taxes, and (iii) on the accounting system of a business (bookkeeping requirements).1 Constraints within in this structure often relate to issues that taxes are too high,
discriminate SMEs against other businesses or burden them with extensive and complicated tax filing and bookkeeping requirements.
Often constraints do not only relate to tax laws but also to bureaucratic behavior, i.e. how
those laws and regulations are executed by the tax authorities. With regards to SMEs the
impact of all taxes has an associated high level of interaction with government. This often
is a source of considerable hassle and thus has direct result on the productivity of the
business. On top, considerable constraints are encountered like (i) informal fees, bribes;
(ii) lengthy procedures, (iii) accountability, and transparency.
With numerous taxes, and a high interface with Government, which is often perceived to
have corruption costs associated with it, the SME sector on many occasions prefers to
stay in the undocumented informal sector or prefers to remain small. It is therefore important to examine the impact of the Tax System on SMEs, because tax laws and regulations
(legislation) as well as the execution of those regulations can hamper the productivity and
thus the growth of the small business sector.
Strategies to remove constraints
In order to remove the before mentioned constraints Governments developed various
strategies. One approach is to directly intervene on business level by granting tax incentives. The other approach is to intervene on macro-level improving the tax environment.
The rationale of tax incentives is to compensate a specific target group for identified deficiencies. There are commonly four kind direct tax incentives found in income tax systems
around the world: Various shortcomings of providing incentives caused a shift of paradigm. Today policies focuses on a cleaner income tax system with few preferences of any
kind, broad tax bases, moderate tax rates. Between 1987 and 1999 almost every OECD
country had reformed its income tax system following major changes to the income tax
structures. If policy makers want to create a conducive tax environment they should have
the following objectives in mind: simple procedures; low tax rates; low official
charges, and fair and impartial treatment of all taxpayers.
1
Lothar Haberstock, Introduction in the Business Economics of Taxation, 6. Auflg., S + W Steuer und Wirtschaftsverlag,
Hamburg, p. 19, 20
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2 SYNOPSIS OF BUSINESS RELEVANT TAX LAWS IN
INDONESIA
2.1 Overview and Focus
The Indonesian tax system and legislation dates back to the Dutch colonial period. It follows the continental European legal tradition, which is primarily based on codified norms
in the form of laws, Presidential Regulations and Ministerial Decrees. Court decisions play
a much less prominent role than in countries following the Anglo-Saxon legal tradition.
In postcolonial times, several major tax reforms have been undertaken:
¾ The 1983 Tax reform consolidated numerous individual laws and decrees into a single, comprehensive Law on Income Tax (Undang Undang No 7, 1983 tentang Pajak
Perhasilan- in future referred to as UU PPh). In addition, the Sales Tax was replaced
with Value Added Tax, albeit a so-called Sales Tax on Luxury Goods has been maintained. Finally, the reform introduced a Law on General Rules and Procedures of
Taxation in order to harmonise assessment and collection of various taxes.
¾ During the 1993 tax reform, the Income Tax Law was revised and complemented by a
number of Presidential Decrees. Revisions in particular related to calculation of taxable profits, the introduction of tax facilities for capital investment in certain business
fields and areas, and taxation of income from sale of land and buildings, stock shares,
venture capital investment and interest on deposits and savings. In addition, procedural regulations for VAT and Sales Tax on Luxury Goods where consolidated with
procedures for other taxes and integrated into the Law on General Rules and Procedures of Taxation.
¾ The 2000 tax reform, entering into force by January 1st, 2001, finally, introduced new
income tax tariffs, and extended the coverage of income tax and VAT by removing a
number of sector-specific and enterprise-specific tax exemptions.
Structure of the Tax System
After the 2000 tax reform, the Indonesian tax system consists of the following taxes:
¾ Income tax is levied on the taxable income of resident individuals, corporations and
non-residents with taxable income from Indonesia. Indonesia does not have a separate Corporate Tax Law. The Income Tax Law applies to individuals and corporations
alike, although applying different income tax tariffs on both groups of taxpayers.
¾ Value Added Tax (VAT) is levied on commercial transactions in Indonesia, excluding
those of the financial sector.
¾ Sales Tax on Luxury Goods is levied on the import or manufacture of certain goods.
Although being referred to as 'Sales Tax' and regulated together with VAT, it in fact
constitutes an excise, as it is only levied once at the source of product origin, and not
on each sale of the respective good.
¾ As most excises are levied as 'Sales Tax on Luxury Goods', Excise Tax plays a less
prominent role. The national government only levies excise tax on tobacco products
and alcoholic beverages. In addition, Indonesia has a moderate motor vehicle fuel
tax, the revenue from which is distributed between provincial (10%) and district/city
governments (90%).
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¾ Tax of Transfer of Land and Building was introduced in 1997. 5% transfer tax is levied on the purchasing price or market value of the transferred object. With the 2000
tax reform, transfers resulting from inheritance and from company mergers, previously
excluded from this tax, became also taxable.
¾ Wealth tax (IPEDA) is levied locally on property (land and buildings) and the wealth of
citizens. It is distributed between districts/cities (90%) and provinces (10%).
¾ Province and district taxes: A number of taxes are raised on the level of the provinces and districts. The provinces raise Motor Vehicle Tax and Tax on Transfer of
Ownership of Motor Vehicles. District taxes regulated by national law include (i)
Hotel and Restaurant Tax, (ii) Advertisement Tax, (iii) Street lighting tax, (iv)
Mineral removal and processing tax and (vi) Water exploitation tax.
Hotel and Restaurant Tax
- The highest tax rate for the hotel and restaurant tax is 10% of the amount paid to
the hotel and/or restaurant.
Entertainment Tax (Pajak Hiburan)
- The highest tax rate for the entertainment tax is 35% of the amount paid or which
should have been paid to watch and/or enjoy entertainment.
Advertisement Tax (Pajak Reklame)
- The highest tax rate for the advertisement tax is 25% of the lease value of the
advertisement.
Tax on Street Lighting (Pajak Penerangan Jalan)
- The highest tax rate for the street lighting tax is 10% of the sales value of the
electrical power and will be collected by PLN (the National Electrical Company)
from the electric bill every month.
Tax on Collecting and Exploiting Group C Mining Products.
- The highest tax is 20% on the sales value of the exploiting proceeds from Group
C Mining Products. The regulation also stipulates the types of Group C mining
products.
Tax on Motor Vehicles (Pajak Kendaraan Bermotor)
- The tax rates for motor vehicles are set at 1.5% for private vehicles, 1% for public
vehicles, and 0.5% for heavy equipment as calculated from the sales value (the
standard market price) or other value which can be used to assess the tax.
Duty on Transfer of Title to Motor Vehicles
- The rates for the duty on the first delivery are 3% and 10%.
- The rates for the duty on the second and subsequent deliveries are 0.3% and
1%.
- The rates for the duty on delivery due to an inheritance are 0.03% and 0.1% (depending on the type of vehicle) calculated from the sales value (the standard
market price) or other value that can be used to assess the tax.
Tax on Water Vehicles (yachts, cruise ships, sports boats, and certain other
vessels)
- The tax rate is set at 1.5% for water vehicles calculated from the sales value (the
standard market price) or other value that can be used to assess the tax.
Duty on Transfer of Title to Water Vehicles
- The duty on the first delivery is set at 5%.
- The duty on the second and subsequent deliveries is set at 1%.
- The duty on deliveries due to an inheritance is set at 0.1% (depending on the
type of vehicle) calculated from the sales value (the standard market price) or
other value that can be used to assess the tax.
Besides the above regional taxes, the regulation also covers taxes on fuel and parking.
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Fiscal decentralization introduced the right for provinces and districts to introduce new
taxes and retributions. Examples of locally introduced taxes include tourist tax, radio tax,
dog-owner licenses, billiard tax and, most controversially, road usage tax.
Withholding Taxes
In general, Indonesia has adopted a self-assessment system. Taxpayers have to register
with the tax offices, and present a periodic or annual Tax Return on relevant taxes. This
system implies that taxpayers have the obligation of computing their own tax liability. It
also implies that in general no official assessment is necessary.
A distinct feature of the Indonesian Tax Law is the widespread use of tax withholding
schemes, which replace self-assessment. Tax withholding extends far beyond tax objects
usually governed by such schemes worldwide such as income from employment or dividends, and also covers a number of business transactions such as professional services,
or subcontracts for certain industries, and even travel abroad by individuals. Moreover, tax
withholding is not restricted to income tax, but also applied to VAT. Withholding mechanisms ar e not regulated in the Law on General Rules and Procedures of Taxation, but in
individual laws and decrees.
Some withholding taxes, such as withholding tax on income from employment, are credited against actual tax due as per Tax Return or Tax Assessment Notice. Others, however, are considered as final. Such Final Withholding Taxes replace transaction taxes
common in many other countries. An example is the Withholding Tax on Income from
Sales Transactions (Government Regulation 41/1994), which, as being final, is materially
a sales tax on stock exchange transactions.
Other public charges
In addition to taxes, public charges (levies) also include
¾ Custom Taxes- Governmental charges imposed on goods at the time they are imported into a state; and
¾ Retributions- Usage fees for specific purposes and services, such as parking or market fees, or airport tax.
¾ Contributions for Social Security and the Foundation for the Mitigation of Poverty.
Report Focus
This Background Report focuses its synopsis on national taxation laws and regulations
including those on withholding taxes.. Time and resource constraints did not allow analyzing local taxes and other public charges in detail. Special consideration is given to the
elements and impacts of the 2000 tax reform.
2.2 Income Tax (revised according to Law No.17 of 2000)
2.2.1 General
The Taxation of individuals and enterprises- independent of the legal form- is stipulated in
a single statute, Undang Undang No 7, 1983 tentang Pajak Perhasilan- UU PPh-, which
was for the third time completely revised by Law No 17, 2000 of 2nd August 2000.
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In order to enhance justice with regards to the imposition of tax, revisions were particularly
made with respect to the coverage of tax subjects, tax objects and deductible expenses.
In order to distribute more proportionate tax burdens among the respective group of taxpayers, the new law distinguishes between individual and corporate taxpayers. The new
law also amends the tax rate structure and introduces a new concept in relation to transfer
pricing issues. Some of the changes made to the old (existing) law are set out below.
2.2.2 Tax subjects
Individuals and undivided estates, legal bodies and permanent establishments are, according to Article 2(1) PPh, subject to income tax:
¾ An undivided estate is defined as a unit in lieu of the beneficiaries.
¾ A body is defined as including the following legal forms (usaha berbadan) according
to Indonesian business law:
•
Limited liability company or Perseroan Terbatas-PT- (Naamlose Vennotschap),
•
Limited partnership (commanditair vennotschap -CV);
•
Other partnerships, namely the basic partnership (maatschap) and open partnership (firma);
•
Cooperatives;
•
Legal entities established and owned by the government, including those in legal forms as defined by Law No. 12/1967 on co-operatives, including Perusahaan Perseroan or Persero (state owned limited liability company), Perusahaan
Umum or Perum (public enterprise), Perusahaan Jawatan or Perjan (government agency), and Perusahaan Daerah or Perusda (local state owned company);
In addition, bodies according to Article 2 PPh include affiliations, associations,
foundations or similar organizations, institutes, pension funds "and other forms of
business".
The only business form without legal incorporation is the sole trader (perorangan). Sole
traders are regarded as individuals, not as bodies under the income law. The sole trader
is the by far most common legal form among SMEs. According to a 1999 survey of the
Indonesian Statistical Office (BPS), more than 98% SMEs operate as sole traders1.
Resident and non-resident tax subjects
The law distinguishes between resident and non-resident tax subjects. Resident tax subjects are individuals residing in Indonesia or present there for more than 183 days in any
twelve-month period, and bodies established or domiciled in Indonesia. Non-resident tax
subjects are individuals residing in Indonesia for less than 183 days, and bodies not established or domiciled in Indonesia, which receive income from Indonesia and/or carry out
activities through a permanent establishment in Indonesia.
Unlike in several other countries, origin does not influence tax status. An Indonesian citizen residing abroad and not visiting Indonesia is not subject to Indonesian income tax. A
foreign citizen residing for more than 183 years in Indonesia, on the other hand, is, as a
1
Profil Usaha Kecil dan Menengah Tidak Berbadan Hukum, Badan Pusat Statisitk, Jakarta, 1999, counts 14.520.041
Indonesian SMEs operating without legal incorporation, compared to 239.408 businesses incorporated as legal entities.
SME in this survey are those with less than 20 employees.
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resident tax subject, liable for income tax in Indonesia with his worldwide income, including income derived from his country of origin.
A permanent establishment is defined as establishment used by a non-resident tax subject to conduct business or engage in activities in Indonesia. Permanent establishments
listed in Article 2 Paragraph 5 PPh include places of management, representative offices
and agents, factories and workshops, construction, installation and assembly projects,
and any furnishing of services conducted for more than sixty days in any twelve-month
period.
Most income tax regulations do not distinguish between the aforementioned types of tax
subjects. However, the 2000 tax reform introduced different tax tariffs for individual tax
subjects and for bodies. For permanent establishments, the list of tax objects is restricted,
as is the list of deductible expenses. Taxation of non-resident taxpayers shall primarily be
effected through final, non-reimbursable withholding of income tax. As this synopsis focuses on SME-relevant aspects of taxation, no further reference will be given to specific
regulation for permanent establishments and non-resident taxpayers.
2.2.3 Tax Objects
Taxable sources of income
According to Article 4 Paragraph 1 PPh, object of income tax is any increase in economic capability received or accrued by a Taxpayer, originating from within or without
Indonesia, which can be used for consumption or to increase the wealth of the taxpayer.
The list of taxable income sources includes, among others,
¾ Income from employment and services,
¾ Lottery prices and awards,
¾ Business profit,
¾ Gains from the sale or transfer of property,
¾ Income from rent, dividends, interest and royalties,
¾ Gains from property revaluation, foreign exchange fluctuation and debt cancellation,
and
¾ insurance payments received.
Non- taxable sources of income
Not taxable according to Article 4 Paragraph 3 PPh are
¾ Aid and donations, including those received in kind for services, e.g. from 'food for
work' projects, and gifts received by small businesses
¾ Gifts received from direct blood relatives, and inheritances,
¾ Payments received from life, health, accident, or education insurance, and
¾ Profit shares received from a limited partnership without shares (C.V.), affiliation, association, firma or kongsi, i.e. enterprise forms with full shareholder liability where the
profit has already been taxed on the enterprise level.
In addition, Article 4 Paragraph 3 k PPH excludes income received or accrued by a venture-capital company as share of the profit of a joint venture with a small or medium7
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SME DEVELOPMENTTA
sized firm from taxation, provided the joint venture engages in certain business activities
to be determined by the Minister of Finance, and its shares are not traded on the stock
exchange. This regulation is to encourage venture capital investment in SMEs.
Changes introduced by the 2000 tax reform
The 2000 tax reform has extended the scope of the following taxable objects:
¾ Dividends received by foundations and legal bodies with limited shareholder
liability (Limited liability company –P.T., cooperatives and State Enterprises) were
previously not categorized as tax objects. Under the new law, these types of dividends
are treated as tax objects. Dividends received from equity participation in business
corporations established and domiciled in Indonesia only continue to be tax exempted
according to Art. 4 (3) PPh if
•
the dividends are paid out from reserved retained earnings, and the recipient is
a cooperative, or a limited liability company or State/Regional owned enterprise
that owns at least 25% of the paid-in capital of the company paying the dividends and has a core business activity other than owning shares in the company paying the dividends; or
•
the dividends are received by a venture capital from investment in or joint ventures with small and medium enterprises (SME). SME in this respect are defined as a company that has annual net sales not more than Rp 5 billion (Ministry of Finance Decree 250/KMK.04/1995)
¾ Interest on Bonds received or obtained by an Investment Fund Company will be
treated as tax objects as of the fifth year of its establishment or the date of its business
license (Article 4 paragraph 3 (j) PPh). Previously, such income was not categorized
as tax object.
The 2000 tax reform has introduced one new tax exemption. According to Article 31B
PPh, gains related to debt restructuring organized through a special institution established by the government, namely the Jakarta Initiative Task Force, are now tax exempt.
The tax exemption covers gains from:
¾ forgiveness of debt;
¾ transfer of property to the creditor for the settlement of debts; and/or
¾ debt-equity swaps.
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2.2.4 Calculation of Net Income
The net income shall be calculated by deducting income-related expenses from the gross
income (Art. 6 PPh). In general, all expenses to earn, recover and secure the income are
deductible according to Article 5 Paragraph 1 Subpara a.) PPh. This includes costs of materials, wages and wage-related expenses, interest, rent, royalties, travel costs, waste
processing costs, administrative costs and taxes other than income tax. Deductible are as
well contributions to an approved pension funds, insurance premiums, foreign exchange
losses and costs of scholarships, apprenticeships and training.
Non-deductible expenses
Non-deductible expenses according to Article 9 PPh include
¾ Profit distribution, including dividends;
¾ Costs incurred for the personal benefit of shareholders, partners or members, as well
as excessive compensation for work paid to shareholders or other parties having a
special relationship; and costs incurred for the personal benefit of a Taxpayer or his
dependents;
¾ Formation or accumulation of reserves, except for bad debts of a bank or a finance
leasing business, reserves in insurance business, and reclamation costs for a mining
business;
¾ Expenses on non-taxable objects such as gift, aid, donations, inheritances, and premiums for personal insurance (with the exception of insurance premiums paid by an
employer as part of the income an employee), as well as expenses incurred in relation
with income subject to final withholding tax (see below for details);
¾ Salaries paid to members of an association, firma or limited partnership, as profit distribution from such bodies is tax-exempt on the level of the shareholders;
¾ Income Tax;
¾ Administrative and criminal penalties in the form of interest, fines and surcharges.
The tax law is unclear on certain promotion expenses: Are expenses for promotional distribution of product samples deductible as expenses to earn and secure income, or nondeductible, because such samples are gifts and donations? What about business lunches
and receptions? No Government Regulation or Ministerial Decree clarifying these questions could be found.
Activation, valuation and depreciation
Article 10 Paragraph 6 PPh stipulates that inventories and the use of inventories for the
calculation of production costs shall be valued according to the purchase price by using
either the average cost of inventory or the first-in first-out method. This means that inventory revaluations carried out according to commercial accounting standards, e.g. revaluating raw material stocks according to a change in world market prices, are not accepted in
income calculation for income tax purposes. No reference is given in the Income Tax Law
to the deductibility or non-deductibility of inventory losses.
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Expenses for assets having a useful life of more than one year may not be deducted in
the year of purchase, but have to be activated and depreciated over the assets' useful life
period (Art. 9(2) PPh). The duty for activation covers expenditures to purchase, erect, expand, improve or alter such assets. There is no indication in the law and corresponding
regulations and decrees that, as in many other countries, major repairs have to be activated. Similarly, shipping costs for durable assets appear to be directly deductible and do
not have to be activated and depreciated.
The income tax law or corresponding regulation and decrees do not include any regulation
on assets of minor value. In many countries, durable assets with acquisition costs below a
certain level, e.g. DM 800 in Germany, do not have to be activated in order to simplify accounting.
Besides tangible assets, businesses also have to activate expenditure to acquire intangible assets and other expenditure with a useful life of more than one year. The catalogue
of respective expenditure in Article 11a PPh is rather limited. It only names expenditures
incurred before the commencement of commercial operations, extraction rights, forestry
concessions, and, optionally, expenditures for the formation and expansion of capital. No
reference is given to intangible assets such as licenses, patents, software, brand names
and goodwill. Article 6 Paragraph 1 PPh stipulates that costs related to research and development carried out in Indonesia do not have to be activated, but can be fully deducted
from gross income in the year when they have arisen. Whether this implies, that costs related to research and development carried out outside Indonesia have to be activated as
intangible assets, remains unclear.
Annual depreciation depends on the expected useful life and the depreciation method
chosen by the taxpayer. Under Indonesian Income Tax Law there are two different depreciation methods available, the use of which depends on whether the asset in question is
movable, immovable, tangible or intangible. For tangible movable assets the taxpayer
may choose between:
¾ Straight-line depreciation, where a fixed percentage is applied annually to the asset’s acquisition cost, or
¾ Reducing-balance (degressive) depreciation, where a fixed percentage is each
year applied to the opening book value.
Figure 1: Depreciation methods and rates according to Article 11 PPh
Type of Asset
Useful Life
in years
Depreciation/Amortization Rates
Straight Line (percent of his- Reducing Balance (percent
torical acquisition cost)
of opening book value)
Movable and Intangible Assets
Category I
4
Category II
8
Category III
16
Category IV
20
Buildings
Permanent
20
Non Perma10
nent
25%
12,5%
6,25%
5%
50%
25%
12,5%
10%
5%
10%
--
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Categories 1-4 are further specified in the attachments of the ministerial decree,
520/KMK.04/2000. Depreciation periods for many assets are rather long compared to international standards. Category I, for example, only includes assets such as small office
equipment and motorcycles, while limousines and trucks are classified in category II, i.e.
eight years usual life. In industrialized countries, road vehicles are usually assigned a useful life of four years, while computers are often even only assigned a useful life of three
years. Similarly, most processing equipment, e.g. for wood processing, is classified in
category III (16 years useful life). The standard in most industrialized countries is depreciation over eight to ten years.
Under a new decree (MoF Decree No. 138/KMK.03/2002), issued April 2002, computers,
printers and scanners are categorized under Category 1 fixed assets. This will accelerate
the monthly depreciation of such assets.
Indonesian tax law does not allow for extraordinary depreciation due to technical outdatedness or a lower market price for comparable used equipment or buildings. However,
in case of sale or withdrawal of assets, the book value is treated as a loss, while the sales
price or insurance reimbursement is treated as income.
Net Income Calculation Norm for small enterprises
Art. 14 PPh sets out that an individual taxpayer with annual gross turnover of not more
than Rp. 600 million may use the Net Income Calculation Norm for income calculation,
provided such intention is communicated to the Director General of Taxes within the first
three months of the tax year concerned. Under this Norm, the net income is calculated as
percentage of gross turnover. The percentage rates to be applied differ by economic activity and region. The respective ordinance of the DG Taxation (Kep – 536/PJ/2000) distinguishes 183 different economic activities and three regional classes (12 major cities, other
district capitals, other regions), which is a total 549 different percentage rates to be applied. If gross turnover stems from several economic activities and/or regions, it has to be
broken up in order to have the correct percentage applied to each turnover component.
While in principle meant to simplify net income calculation, it is questionable whether the
Net Income Calculation Norm in its current level of sophistication and detail can reach this
objective.
Income Tax for Certain Individual Traders
From 1 April 2002 on, an individual trader in the consumer goods retail business (excluding restaurants and motor vehicle trading) with outlets in several locations has to pay
monthly Income Tax instalments at 2% per month of gross income, MoF Decree No.
84/KMK/ 2002, DGT Decree No. 171/PJ/2002)
2000 Tax Reform
The 2000 tax reform introduced a number of new regulations and clarifications with respect to tax deductibility:
¾ Bad debt: Previously, non-collectible receivables could be deducted from profit. Under
the new law, write-off of non-collectible receivables is only deductible under certain
conditions, including corresponding write-off in the commercial balance sheet, and
failure to collect the debt by court order, or publicly declared bankruptcy of the debtor.
¾ Benefits in Kind: Deductibility of expenses for food and drinks provided by the employer was not regulated under the old law. Under the new law, food and drinks are
treated as deductible expenses as long as they are provided to all employees.
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¾ Installation costs: Under the old law, expenses for installation of tangible assets with
a useful life of more than one year had to be activated and depreciated. Under the
new law, installation costs are directly deductible and do not require activation and depreciation anymore.
¾ Review of asset classification: No changes in the basic depreciation tables have
been made during the 2000 tax reform. However, some reclassification of assets took
place. Category II, e.g., now includes certain equipment in the semiconductor industry.
Furthermore, unspecified assets will now be subject to classification by the Ministry of
Finance. Previously, unspecified assets were deemed to be included under Category
III (16 years useful life).
¾ Depreciation as tax incentive: In order to boost direct investment in Indonesia, Article 31A PPh of the old law provided a general clause allowing the government granting unspecified tax incentives to taxpayers investing in certain business sectors
and/or certain areas. As application of this clause had in some cases raised concern
about eventual abuse in the interest of specific investors, the new law now specifies
these incentives in more detail. It basically foresees the option for the government to
double straight-line and reducing-balance depreciation rates for specific business sectors as a means to enhance investment in those sectors.
2.2.5 Tax Base
The taxable income (tax base) is derived from the net income by deducting the following
positions where applicable:
¾ Losses incurred in previous tax periods:. Such losses can in general be carried
forward for a maximum of five consecutive years (Art. 6 (2) PPh). Article 31A PPh of
the new law provides the possibility to extend by Government Regulation the loss
compensation period to a maximum of 10 years for taxpayers investing in specific
business sectors and/or locations
¾ Tax Free Allowances for individual tax payers (Article 7 PPh) as follows:
•
Rp. 2,880,000 (Rp. 1,728,000 before the 2000 tax reform) for each taxpayer. If
both partners of a married couple earn taxable income, each of them is entitled
to this allowance.
•
an additional amount of Rp.1,400,000 (before Rp. 864,000) for a married taxpayer whose spouse does not have own income.
•
an additional amount of Rp.1, 440,000 (before Rp. 864,000) for any bloodrelated members of the family and relatives by marriage in direct line and
adopted children, who are full dependents of the taxpayer, for up to three (3)
dependents.
¾ Investment Allowance: In order to boost direct investment in Indonesia, Article 31A
PPh allows for reducing the taxable net income from investment in specific business
sectors and/or locations to a maximum of 30% of the invested amount. Details have to
be defined by respective Government Regulation.
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2.2.6 Tax Calculation (Tax rates)
Indonesia operates with a progressive income tax tariff, i.e. tax rates increase with taxable
net income. Payable income tax is calculated by multiplying the taxable net income with
the income tax rate applicable to each respective income bracket (progression zone).
The 2000 Tax Reform introduced a new tax rate structure. The main purpose was to distribute more proportionate tax burdens among different groups of taxpayers. The main
features of the new structure are:
¾ Introducing separate tax tariffs for individual and corporate taxpayers;
¾ Reducing tax rates for lower income brackets;
¾ Increasing the top tax rate for individual taxpayers from 30% to 35%.
In combination with the increase in tax free allowances for individual taxpayers, the reform
has significantly reduced the tax burden of low and middle-income taxpayers.
Figure 2: Tax Tariffs Before and After the 2000 Tax Reform
Progression Zone (Taxable Income in Million Rp.)
0-25
25-50
50-100
100-200
over 200
Tax free allowances
Taxpayer
Spouse with own income
Spouse without own income
Each other dependant (max. 3)
Maximum Tax Free Allowance (2
earners, 3 dependants)
Tax Rate Until 2000
Individual and Corporate Taxpayers
5%
15%
30%
Tax Rate from 2001
Individual
Corporate
Taxpayer
Taxpayer
5%
10%
10%
15%
15%
25%
30%
35%
Rp. 1,728,000
Rp. 1,728,000
Rp 864,000
Rp 864,000
Rp. 2,880,000
Rp. 2,880,000
Rp. 1,440,000
Rp. 1,440,000
Rp. 6,048,000
Rp. 10,080,000
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Individual taxpayers
A before-after comparison yields that the increase in the top tax rate for individual taxpayers from 30% to 35% leads to higher total tax payable if the net income exceeds Rp. 540
million. For taxpayers with a net income below this level, total income tax payable is reduced by tax rate reduction in the Rp. 25-50 million income bracket and introduction of
two new progression zones for the income brackets from Rp. 50-100 million and Rp. 100200 million. In absolute figures, the relief is most pronounced for net incomes between Rp.
150-250 million. Tax payable in this income range is reduced by some Rp. 15 million. In
relative terms, taxpayers with a net income below Rp. 100 million benefit most. Their total
tax payable is reduced by 50% or more. Figure 1 on the following page illustrates these
effects of the 2000 tax reform in more detail.1
Figure 3: Income Tax Payable by Individual Tax Payers, Before and After the Tax Reform 2000
Tax Payable (Rp. Million)
200
After 2000 Tax
Reform
150
Before 2000 Tax
Reform
100
50
0
0
50
100
150
200
250
300
350
Net Income (Rp. Million)
400
450
500
550
600
The vast majority of SME operate as sole trader and are therefore taxed as individual tax
payers, Less than 4% of the respondents to the TA's survey indicated a turnover of more
than Rp. 1,5 billion. It is therefore fair to assume that most SME generate net incomes below Rp. 250 million and benefit significantly from the 2000 tax reform.
1
In order to simplify tabulation, Rp. 5 million total tax free allowance before and Rp. 10 million total tax free allowance
after the 2000 tax reform were assumed.
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Corporations
For Corporations, implications of the 2000 tax reform are less pronounced. Corporations
with a taxable net income of less than Rp. 50 million have to pay more income tax due to
Income Tax after the Tax Reform 2000, as the tax rate in the lowest income bracket has
been doubled. The top tax rate for corporations has been left unchanged at 30%. Since
this tax rate will now only be applied from Rp. 100 million taxable net income onwards,
while before the tax reform it was already applied above Rp. 50 million taxable net income, corporations in the highest income bracket enjoy a tax relief of Rp. 9 million, independent of net income.
Figure 4: Income Tax Payable by Corporate Tax Payers, Before and After the Tax Reform 2000
Tax Payable (Rp. Million)
200
150
After 2000 Tax
Reform
100
Before 2000 Tax
Reform
50
0
0
50
100
150
200
250
300
350
400
450
500
550
600
Net Income (Rp. Million)
2.2.7 Withholding Taxes
Indonesian income tax is to a considerable extent collected through a system of withholding taxes and other specific collection mechanisms. Depending on the type of income,
withholding may either be final, i.e. replacing tax calculation based on net income and
progressive tax tariffs, or the withheld tax is creditable against the tax liability computed
according to the standard procedures as described above. According to Article 20 (3)
PPh, all tax withheld is creditable unless specifically imposed as final.
There is a multiplicity of legal sources and tax withholding / collecting mechanisms. Core
regulations in the Income Tax Law are as follows:
¾ Art 4 (2) PPH provides that tax on income from interest on deposits and other savings,
stock exchange transactions, and transfer of land and buildings and other specific income shall be imposed based on specific Government Regulation. According to Art.
17 (7) PPh, such Government Regulation may define special tax rates for these types
of income, provided such special rates do not exceed the tax rate for the highest income bracket. Both articles in conjunction are the legal base of final withholding
taxes. This legal construction raises considerable concern. Since withholding procedures and final tax rates are defined in Government Regulation instead of in the Income Tax Law itself, legislative control over key elements of the tax system is removed, and regulatory transparency for taxpayers is reduced considerably. Moreover,
as a general clause that allows defining specific tax rates and collection procedures
by means of government regulation, Art 4 (2) in connection with Art. 17 (7) PPh also
extend onto "other specific income" that remains unspecified.
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¾ Art 21 PPh stipulates that "Income Tax in connection with work, services or activities
… (of) a resident individual Taxpayer" shall be withheld by the employer, or, as far as
pensions are concerned, the pension fund or comparable body. Tax withholding under
this article also extends towards employment of professionals performing independent
work for corporate taxpayers, other legal bodies or the government.
¾ Art 22 PPh entitles the Minister of Finance to "designate government treasurers to
collect taxes in connection with payment for delivery of goods", and to "designate certain bodies to collect tax from a tax payer conducting activities in the import sector or
business activities in other sectors". From a systematic perspective, this article is of
major concern, since it allows tax collection based on tax-deductible expenditure, irrespectively of whether this expenditure will result in taxable income or not. Moreover,
the law does not stipulate any formal requirements (e.g. a government or ministerial
decree) for such 'designation', which implies that respective regulation also does not
have to be published. Tax withholding and collection established in relation to this article is reported to include tax collection from importers based on the CIF import value,
as well as tax collection by manufacturers of certain commodities (cigarettes, sugar,
flour, cement, steel, automotives, petrol) on behalf of their products' distributors and
users1. Whether the tax withheld / collected in relation to this article is final or creditable could not be established.
¾ Art. 23 PPh specifies withholding rates and withholders for a number of other income
types, including dividends, royalties, gifts and rewards, rent and other income in connection with the use of property, and consultancy and other services rendered by corporate taxpayers.
¾ Art 25 (8) PPh stipulates that an individual taxpayer leaving the country shall pay
taxes according to provisions determined by Government Regulation. The respective
Government Regulation 46/94 foresees an 'exit tax' collected by port and airport officials as prepayment on the annual income tax due. It is in principle legitimate to install
a tax collection mechanism for resident taxpayers that are likely to evade their tax duty
by permanently leaving the country. However, the current regulation is mainly collecting 'exit tax' from business and leisure travellers.
¾ Art. 26 PPh stipulates that most income received by a non-resident taxpayer other
than a permanent establishment in Indonesia shall be subject to 20% final withholding
tax.
1
J.S. Uppal, Taxation in Indonesia, Second Edition 2000, Gaja Mada University Press, Yogyakarta, p.16 ff.
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Major Changes of Withholding Tax Rates after the 2000 Tax Reform
The 2000 Tax Reform did not substantially alter the legal base for tax withholding and external collection. However, some withholding tax rates were revised, including
¾ Increasing the final withholding tax rate on interest income from deposits and savings from 15% to 20%;
¾ Increasing the final withholding tax rate on Rentals of Land and/or Buildings from
6% to 10%
¾ Reverting the withholding tax on interest income from deposits paid by cooperatives from creditable to final withholding, while leaving the withholding rate unchanged
at 15%;
¾ Withdrawing/ limiting the final tax of 4% on consulting income and increasing the effective withholding tax rate ( now creditable) on fees for professional services, including legal, tax, technical and management consultancy, from 6% to 7,5% of gross income;
¾ Increasing the effective withholding tax rate (creditable) on fees for drilling and supporting services to the oil & gas and mining sectors from 4,5% to 6% of gross income;
¾ Introducing a new withholding tax for construction services.
Table 3 provides more specific insight into the various kinds of tax withholding and collection mechanisms, their character (final / creditable) and the withholding rates applied. Due
to the large variety of legal sources, the table may, in spite of intensive research undertaken, be incomplete or partly outdated. This concerns in particular tax withholding for input purchase according to Art. 22 PPh. Nevertheless, the table documents the extent to
which tax withholding and external collection has been replacing regular income tax assessment and collection in Indonesia.
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Figure 5: Overview Withholding Taxes
Activity /
Income
source
Interest &
discount
amortization
on traded
bonds
Sale of
traded
bonds
Sale of
listed shares
Sale of
founder's
shares in
listed companies
Sale of
shares in
non-listed
SME
Sale or
transfer of
land and
buildings
Tax subject
Tax rate
and base
Character
Withholder
/ Collector
Non-bank Legal body
(except pension funds)
15% of gross
income
Final
Bank
Art. 4 (II) PPH in
conjunction with GR
139/2000
Non-bank Legal Body (except pension
funds)
Resident Taxpayer
0.03% of
gross transaction value
Final
Stock Exchange
Art. 4 (II) PPH in
conjunction with GR
139/2000
0.1% of gross
transaction
value
Resident Tax5% +0.1% of
payer (except gross transacVenture Capital
tion value
Companies)
Final
Stock Exchange
Final
Stock Exchange
Art. 4 (II) PPH in
conjunction with GR
41/1994
Art. 4 (II) PPH in
conjunction with GR
41/1994
Final
Venture Capital Company
itself
Venture Capital 0,1% of gross
Companies
transaction
value
Resident Taxpayer
5% of gross
value (either
purchasing
price or value
determined
for Land and
Building Tax,
whatever is
higher)
Final for
individual
taxpayers;
Creditable
for legal
bodies
Official approving the
transfer /
Treasurer in
case of government purchase
Interest on
bank deposits and savings
Non-bank
Resident Taxpayer
(except pension funds)
20% of gross
income
Final
Bank
Income from
Work
Individual Taxpayer
Employee
Pensions
Individual Taxpayer
Tax Rates Art
17 applied on
Gross Income
Pension received taxed
at regular
tariff
Individual
Taxpayers
with total
annual
income
below tax
free allowance may
apply for
refund with
DGT
Creditable
Creditable
Pension fund
or comparable body
Excemptions
Tax Law/ Regulation
Art. 4 (II) PPH in
conjunction with GR
4/1995
Not applicable to inheritance, gifts to
blood relatives and social organizations, sale to
the Government in public
interest, and
transfer values below
Rp. 60 million
Not applicable to savings
below Rp. 7,5
million, and
savings with
housing
banks.
Art. 4 (II) PPH in
conjunction with GR
4/1995
Art. 4 (II) PPH in
conjunction with GR
131/2000
Art 21 PPH
Article 21 PPh
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Activity /
Income
source
Services
Tax subject
Tax rate
and base
Character
Withholder
/ Collector
Resident
Taxpayers
Creditable
Legal body
paying the
service fee
Supply and
services
rendered to
government
agents
Import
Resident
Taxpayers
15% of estimated net
income, determined as
percentage of
gross income.
See Table 4
below for details
15% of estimated net
income (1,5%
of gross income)
7.5% of CIF
value (2.5%
with import
license)
0.15% of the
on the exise
stamp price
unclear
Government
agents
unclear
Customs offices
Art. 22 PPh
final
Art. 22 PPh, DGT
Decree No. KEP529/PJ/2001
0.45% of the
tax base for
VAT purposes
0.3% of the
tax base for
VAT purposes
0.25% of the
selling price
Rp. 380/ 100
kg for distributors, Rp.
270/100 kg.
for wholesalers
Rp. 53/ box
for distributors, Rp. 38/
box for
wholesalers
0,3% of sales
price to private distributors
15% of gross
income
unclear
Cigarette
manufacturer
appointed as
tax collectors
Manufacturer
unclear
Steel
manufacturer
Art. 22 PPh
unclear
All Cement
manufacturer
BULOG (The
State Logistics)
Art. 22 PPh
Resident taxpayers
Trade in
Cigarettes
Resident
Taxpayers
Trade in
Automotives
Resident
Taxpayers
Purchase of
Steel
Resident
Taxpayers
Purchase of
cement
Trade in
Sugar
Resident
Taxpayers
Resident
Taxpayers
Trade in
flour
Resident
Taxpayers
Petrol &
Kerosene
trade
Resident
Taxpayers
unclear
Excemptions
Tax Law/ Regulation
Art. 21(1) PPh for
individual taxpayers,
Art. 23(1)c.2 PPh for
bodies, both in conjunction with DGT
Guidelines
Not applicable to services specified in DGT
guidelines
Art. 22, 23(1)c.2
PPh
Art. 22 PPh
Art. 22 PPh
unclear
BULOG (The
State Logistics)
unclear
PERTAMINA
Art. 22 PPh
(state-owned
petrol company)
Art. 23 (1) b PPh
Cooperative Not applicable to savings
below a level
as stipulated
by the MoF
Bank
Art. 23 (1) a.2 PPh
Interest on
savings with
cooperatives
Non-bank
Resident Taxpayer
Final
Interest on
loan repayment guarantees (financial collateral)
Dividends
paid by legal
bodies with
limited liability
Non-bank
Resident Taxpayer
15% of gross
income
Creditable
Non-bank
Resident Taxpayer
15% of gross
income
Creditable
Legal body
Art. 22 PPh
Art. 23 (1) a.1 PPh
Not applicable to surplus
distributed by
a cooperative
below a level
as stipulated
by the MoF
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Activity /
Income
source
Royalties
Construction
Rent and
other property income
SME DEVELOPMENTTA
Tax subject
Tax rate
and base
Character
Withholder
/ Collector
Non-bank
Resident Taxpayer
Resident
Taxpayers
15% of gross
income
Creditable
Legal body
Art. 23 (1) a.3 PPh
4% of gross
construction
value (2% in
specific
cases)
Creditable
Legal body
Art. 23 PPh in conjunction with GR
140/2000
Non-bank
Resident Taxpayer
10% of gross
income)
Final for
small companies below Rp. 1
bn. turnover
Final
Legal
paying
rent
Excemptions
body Not applicathe ble to financial leasing
Tax Law/ Regulation
Art. 23 (1) c.1 PPh in
conjunction with GR
No.5 5/2002; MoF
Decree No.
120/KMK.03/2002
Figure 6: Other services subject to PPH 23 Withholding Tax and their respective Tax
Rates
Service
Professional services, including accounting,
tax advice, management & technical consultancy, architecture and interior design
Brokerage
Drilling and other services to the oil, gas
and mining industries
Timber cutting
Pest control & cleaning services
Actuary, film dubbing / mixing
Estimated Net Income
(ENI), in percent of
gross income
Effective Rate (15%
of ENI), in percent of
gross income
50%
7.5%
60%
40%
9%
6%
40%
10%
40%
6%
1.5%
6%
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2.3 Value Added Tax
The Value Added Tax (VAT) is stipulated together with the Sales Tax on Luxury Goods in
a single statute, Undang Undang No 8, 1983 tentang Pajak Pertambahan Nilai Barang
dan Jasa dan Pajak Penjualan atas Barang Mewah (PPn.BM)-, which was for the second
time completely revised by Law No 18, 2000 of 2nd August 2000.
Value Added Tax is imposed on private consumption. For practical purposes however this
tax is not collected on consumer level but on the level where the goods/ services are
transferred, i.e on business level (indirect tax). The entrepreneur raises the price of the
product in the amount of the applicable VAT rate and pays this amount to the tax office.
As VAT should be collected only once at the end of the consumer chain, the entrepreneur,
who buys goods for further processing, is allowed to credit VAT paid (Input VAT) against
the collected tax (Output VAT).
2.3.1 Tax Subject
Tax Subjects are firms, transferring goods and services, small firms, which opt for registration as a taxable firm, and individuals or bodies, utilizing intangible taxable
goods/services obtained from outside the customs area, Art. 3A PPn.BM.
Option of Tax Subject to be VAT exempt — Small-scale companies can opt to be exempted from VAT, Art. 1, Decree Minister of Finance, No. 552/KMK.04/2000. Small-scale
entrepreneurs meant in this decree are companies, which transfer taxable goods and/or
services not exceeding a certain threshold of turnover.
¾ Taxable goods with the gross turnover not exceeding Rp. 360,000,000.00 (three hundred and sixty million rupiahs);
¾ Taxable services with the gross revenue not exceeding Rp. 180,000,000.00 (one hundred and eighty million rupiahs);
¾ The delivery of taxable goods and the provision of taxable services with the gross
turnover and gross revenue not exceeding:
-
Rp. 360,000,000.00 (three hundred and sixty million rupiahs) if the turnover of taxable goods is more than 50% (fifty percent) of the total gross
turnover and gross revenue; or;
-
Rp. 180,000,000.00 (one hundred and eighty million rupiahs) if the revenue from taxable services is more than 50% (fifty percent) of the total
gross turnover and gross revenue.
Tax Reform 2000- The threshold for small sized companies has been raised from Rp
24.000.000,00 to 360,000,000.00 (goods) and 180,000,000.00 (services).
2.3.2 Tax Object
Tax object is the delivery of taxable goods and/or services performed by an entrepreneur. Deliveries, which are involved are imports, exports and transfer of goods as well as
the provisions of services, Art.4 PPn.BM. Art 1 A (1) PPN further sets out examples, e.g.
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the transfer of an title over an taxable good, delivery of an taxable good under a leasing
agreement. The scope of the tax object is reduced by exempting specific deliveries and/or
specific goods, services.
Non taxable transactions
Excluded from the definition of “transfer”, consequently not taxable, is for example the
transfer of taxable goods as a collateral for loans, Art 1 A (2) b PPN; see further the list of
non taxable transactions in Art 1 d (2) a-e. Further, transfers of goods by retailers (who
use the 2% base) to their branches are subject to VAT
Non taxable tax objects
Depending either on the type of goods/services, the type of transaction the transaction
can be tax exempt. Some tax objects that were previously exempt are –after Tax Reform
2000- “vat able”. These formerly tax exempted goods include: electricity; agricultural, plantation and forestry products; the produce of animal husbandry, hunting or breeding of livestock; fish farming products and piped clean water.
In the following table the products/ services, which transaction is still tax exempt, has
been listed.
Figure 7: Examples of VAT exempted goods/services
Tax object
Tax exempted goods:
produce of mining / excavating/ drilling directly from its source
basic necessities
food beverages served in restaurants, food
stalls
money, gold bars
Tax exempted services:
medical health
social services
mail
banking, insurance and leasing with option
to purchase
religion
education
arts
broadcasting
public transportation
man power
hotels
public services
Tax Law/ Regulation
Art 4 A (2) PPN in conjunction
with respective Government
Regulations
Art 4 A (3) PPN in conjunction
with respective Government
Regulations
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Tax exempted imports:
-
goods to serve places, which are open to Art 4 A (3) PPN in conjunction
the public or used for public need
with respective Government
Regulations
coffins
parcels for cultural events
goods for scientific research
goods for handicapped people
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Tax Reform 2000- Tax Reform 2000 aims to reduce the VAT exemptions. The new law
restricts the category of goods that are exempt from VAT to unprocessed minerals, basic
commodities (like rice), food and beverage served among others at hotels, and money,
gold bars, and commercial papers.
Previously tax exempted goods became VAT able (e.g. agriculture, electricity, plantation
and forestry products; the produce of animal husbandry, hunting or breeding of livestock;
fish farming products and pipe clean water or the transfer of vatable goods within the
framework of a business merger or consolidation.
2.3.3 Tax Base
Tax base is the either the selling price (without VAT and Luxury Sales Tax) of the taxable
good/service or for entrepreneurs, who may opt for paying VAT based on the turnover
(e.g. retailer, travel agent, couriers, factors). For imports the sales price plus custom duty
is taken as tax base. If the selling price or consideration is influenced by a special relationship (e.g. a firm has control over another firm) the price shall be calculated on the basis of a fair market price, Art 2 PPN.
For all the other tax subjects and those retailers, who do not opt for the deemed 2% VAT
based on the turnover, tax base is selling price as set out in a commercial invoice. Tax
subjects may now be able to use one commercial invoice rather than being required to
issue a further tax invoice (faktur pajak).
2.3.4 Tax Tariff
Rule
As a general rule all VAT able transactions are subject to a standard tax rate of 10 per
cent VAT, Art. 7 (I) PPN.
Exemptions from general tax tariff: Zero Per Cent VAT for exports
Exports are rated zero per cent, Art 7 (2) PPN. Further, accelerated imposition of 0% VAT
on exports for designated exporter companies (PET) applied to services and goods in the
form of raw material and/or auxiliary materials by domestic taxable companies.
Exemption: Special VAT Rates
Retailer registering for VAT can opt to pay VAT at a rate of 2 percent of turnover. A decree of the MoF, No 567/KMK.04/2000, further confirms the special VAT rates for the deliveries of certain goods or services such as travel agent (1%), courier services (1%), factoring (0,5%). It also adds a new rate of 1% for second hand motor vehicles
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2.3.5 Computing of VAT Liability
The final VAT liability is computed by self assessment using the tax credit method
(2.3.5.1). VAT Law reserves exemptions from final tax liability where it may either be born
by Government or not collected.
2.3.5.1 Tax Credit Method
One of the most important features of the VAT system is the Input Tax Credit Method. The
entrepreneur is entitled to deduct the tax paid on intermediate input from the tax liability on
sale value of the output, if such purchases are directly used in the manufacturing process.
The entitlement to input VAT reduction is subject to limitations and whether the entrepreneur carries out tax-exempt transactions. Where the balance results in excess input VAT,
a refund in cash is obtained from the authorities. Since this method can be used fraudulently and for cross checking purposes, a tax invoice must be issued by a taxable firm for
any transaction subject to VAT.
Exemptions from Tax Credit Method- If the transfer of goods/services is VAT exempt
in-put tax may not be credited, Art 16 (3) PPN. The same holds true for retailers, who opt
to pay VAT on a deemed 2% base.
2.3.5.2 Exemptions from final VAT Liabilty
VAT borne by the Government- VAT due on import or the delivery of certain
goods/services can be borne by the Government. What kind of goods/services are eligible
are further stipulated in numerous presidential decrees. Tax is born by the Government for
example for basic materials like coins, stamps excise paper, or weaponry. VAT is further
borne by the for the delivery/construction of low-cost housing.
Tax Reform 2000- VAT on the importation of capital goods is no longer borne by the
Government.
Non Collection of VAT- Art 16B PPN provides that it may be determined by Government
Regulation that tax due shall not be collected in part or in full. Government Regulations
set out that VAT is generally not collected on specified activities/goods in the bonded- /
development zones, eg. Bantam Island, or Karimum Island, GR #20 2000.
A Ministerial Decree #642, 1994 provided that retailers registering for VAT were permitted
to pay 2 % of total value of sales with no credits in lieu of paying regular VAT. However,
this VAT mechanism has been recently changed. Unfortunately we can not review the
content as we were not able to obtain this regulation.
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2.3.6 Procedures
Timing of VAT
VAT is due at the time of transfer at its place of residence. Entrepreneurs in Indonesia are
in general obliged to prepare monthly preliminary VAT returns (periodic tax returns) in
which they offset input VAT against out put VAT. Any access of output VAT over input
VAT must be paid to the Tax Office by the following of the following month. A monthly tax
return is required to be lodged by the 20th of each month. Further simplification with regards to exempting small enterprises from filing periodic tax returns have not been encountered.
VAT Refund
According to the old procedures, every claim for refund must still be audited before the
credit is refunded. A refund takes up to 12 month- sometimes even more- and is subject to
the tax authorities review/ audit (except for exporters and enterprises making supplies to
tax collectors). Under the new law all taxable enterprises can claim monthly refunds
whenever (creditable inputs for a month exceed outputs. The authorities have to process
the VAT refunds within two month for enterprises making supplies for tax collectors, otherwise the refund is considered to be approved. For other taxpayers the process has to
be processed within six month. If the taxpayer satisfies certain criteria, the refund process
may be even granted within seven days by making advance refund payments, i.e. prior to
tax audit. The main criteria for an advance refund are: compliance, no outstanding tax liabilities, audited financial statements by public accountant. However careful attention is
recommended in applying the advance refund process since 100% penalty will be imposed if a subsequent tax audit results in an underpaid position.
VAT Invoices
Tax Reform 2000 provides that Commercial invoice can be used as a standard tax invoice
provided sufficient detail is provided:
¾ Name, address, and tax ID number of taxpayer delivering the taxable
goods/services
¾ Name, address, and tax ID number of buyer
¾ Type of good/service, quantity, sales price or compensation and any discounts
¾ VAT that has been collected
¾ LST that has been collected
¾ Code, serial number, and date of issuance of the invoice; and
¾ Name, position, and signature
It should be noticed that a 2% penalty of the tax base will be imposed for defective invoices. With regards to administration of the invoices a various decrees have been re26
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cently issued. For example, taxpayers who issues 500 or more standard VAT invoices a
month should report VAT returns electronically, KEP-756/PJ/2001.
VAT Centralization
VAT is also levied on deliveries of goods from a head office to branches or between
branches and on deliveries to intermediaries. Companies require VAT centralisation or the
deliveries to branches will be considered taxable. The question of inter-branch trading, reallocation of costs and the centralisation of VAT reporting has always been a source of
difficulty and additional cost for businesses in Indonesia. In many countries with a system
of VAT, transactions between branches are usually disregarded for VAT purposes on the
basis that, in terms of commercial law, one cannot contract with oneself. In Indonesia
however, the movement of goods between branches, including the head office, are specifically stated in the law to be within the scope of VAT and subject to tax. As such, it is
necessary for these to be treated as sales that require VAT invoices to be issued, even
though a commercial invoice would not usually be produced or required. Failure to apply
the VAT will result in penalties and interest being incurred.
2.4 Sales Tax on Luxury Goods (SLG)
General- The Sales Tax on Luxury Goods (STLG) is stipulated together with VAT in a
single statute, Undang Undang No 8, 1983 tentang Pajak Pertambahan Nilai Barang
(PPN) dan Jasa dan Pajak Penjualan atas Barang Mewah (PPn.BM)-, which was for the
second time completely revised by Law No 18, 2000 of 2nd August 2000. The STLG is imposed additional to the VAT on private consumption of luxury goods and has been introduced to discourage the private consumptions of certain goods. For practical purposes
however this tax is not collected on consumer level but on the level where the luxury
goods are transferred/ imported, i.e on business level (indirect tax). The producer or the
importer of a luxury good raises the price of the product in the amount of the applicable
STLG rate and pays this amount to the tax office. As STLG is collected only once at the
beginning of the consumer chain thus no credit and refund mechanisms (like for VAT) apply, Art 10 PPnBM.
Tax subjects are firms, which produce or import goods categorized as luxuries, Art 5 (1)
PPn.BM.
Tax Object- is the transfer or the import of goods, which are categorized as luxuries, Art 5
(1) a. b. PPnBM. Those goods are either motor vehicles or goods other than motor vehicles (e.g. dairy products, household goods, televisions, alcoholic beverages) and are
mainly listed in two Ministerial Decrees (Ministerial Decree550/KMK.04/2000,
569/KMK.04/2000). The meaning for transfer is the same as for VAT.
Exemptions- As for VAT several Government Regulations foresee exemptions from
Sales Tax on Luxury Goods, mostly for domestically produced products, which would be
otherwise due for tax, e.g. footwear, leatherware.
Tax Base is the sales price, market price (in cases of special relationship), or the import
value (sales price plus import duty.)
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Tax Rate- the lowest range of tariffs being 10% (ten percent) and the highest being 75 per
cent, Art. 8 PPn.BM.
Tax Reform 2000 broadens the range of tariff for the Sales Tax on Luxury Goods as well
as increased the rate applicable to many types of goods.
Figure 8: Luxury Tax on Goods
Rate
Goods
Luxury Tax other than motor vehicle, Art 8 PPn.BM Ministerial Decree550/KMK.04/2000
10 per cent
a.o. dairy products, juice, house hold appliances, sport goods, toys
20 per cent
Household goods on higher level, luxury residences, cosmetic products, optical
instruments, computer, perfume, carpets
30 per cent
Sport equipment like boats, golf, television
40 per cent
Alcoholic beverages like beer, carpets made of certain material, watches, ceramics, office appliances, articles made of special stones/ metal
50 per cent
Carpets made of certain material, air crafts
75 per cent
Alcohol like wine, spirits, articles made of special stones/ metal
Luxury Tax on motor vehicle, 569/KMK.04/2000
From 10% to 75% e.g. 10% vehicles for 10 or more people,. 75 % for vehicles between 3500 –
4000 CC and for less than 10 people.
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2.5 Tax of Transfer of Land and Building (TTLB)
Tax of Transfer of Land and Building was introduced in 1997. Before, only the income
from the transfer of land and building was taxed (5% final withholding tax on the transfer
value). Now, both Income Tax and Transfer of Land and Building Tax are cumulatively
due. The “new “ Law on Tax of Transfer of Land and Building (Law No. 20/2000) imposes
an additional tax only on transfer of the title.
Tax Subject is the organization or individual acquiring the rights to the relevant land
and/or building.
Tax Object is the acquisition of a right to land or building, Art 2 (1) TTLB. The acquisition
involves a transfer of a right. Transfer (how) and types of rights (what) are further defined
in Art 2 (2) a. b. TTLB. Under the new law, tax payable on the acquisition of the title of the
land is extended to acquisition via inheritance, or a merger.
Exemptions-certain transfers are considered not to be tax objects, Art. 3 TTLB e.g. transfers for religious purposes.
Tax Base-The dutiable value is the higher of the transaction value or the officiallydetermined value and the payment must be made at the time the respective parties register the transfer (for inheritance) at the relevant Land office or at the signing of the deed
(for mergers, consolidations or a company’s expansion).
Tax free allowances- regions (kabupaten/ kota) are authorized to stipulate (i) tax free allowances up to Rp. 60.000.000,00 (previous 30 million) and (ii) in the case of heritage or
transfer within the family up to 300.000.000,00, Art 7 (1) TTLB organization or individual
acquiring the rights to the relevant land and/or buildings.BpaTdB..
Tax Tariff- The so computed tax base is subject to tax at a rate of 5%.
Exemptions from Tax- of Transfer of Land and Building- Art 3 TTLB and various Decrees foresee (i) exemptions, (ii) discounts, (iii) reductions from tax liability.
Exemptions are mainly granted for transfers, which serve public interest (e.g. protected
forests, social activities).
100 % reduction in the duty may be available for certain restructuring necessitated by the
monetary crisis.
Discounts up to 75% of the tax payable are granted to original owners and those who are
less fortunate or retired for tax objects, which are not utilized according to their potential.
Reduction of 50 % of land and building tax are granted for investment in certain industries
taking place in certain geographic areas leading to at least 30% business expansion.
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2.6 General Rules and Procedures of Taxation
General Rules regarding the tax laws as well as procedures of taxation (administration)
are stipulated in Undang Undang No 6, 1983 Tentang Ketentuan Umun Dan Tata Cara
Perpajakan (KUdTCP), which was for the second time revised by Law No. 19, 2nd August
2000. It is further complemented by Ministerial Decrees and administrative decisions.
General rules regulations apply to all tax-types, i.e. Income Tax, VAT, Sales Tax on Luxury Goods, Land and Building Tax and stipulate when for example tax payments are due,
how books of accounts should be held and when tax returns should be filed. It further provides regulations for penalties, interests, fines. These general rules are than further specified in the respective tax laws (Income Tax, VAT etc.). Besides General Rules applicable
for tax laws the statute contains procedures for tax administration, stipulating registration
requirements, how and when tax returns have to be filed, etc..
2.6.1 Taxpayer’s General Obligations towards Tax Authorities
These obligations range from requirements to (i) register, (ii) keep proper documentation
(books and records, (iii) to self-assess the tax liablity. The self assessments of tax liability
includes requirements to file a tax returns, compute own tax liability, perform downpayments. Heavy administrative fines or criminal charges are imposed on those, who do
not comply. In the following sub-chapter those obligations are further elaborated together
with its respective fines.
2.6.1.1 Registration Requirements
Obligation to obtain Taxpayer Identification Number (NPWP)
Art. 2 (1) 1 stipulates that every Taxpayer is obliged to register at the Office of the Directorate General of Taxes in the district where the taxpayer lives and to obtain a Taxpayer
Identification Number (NPWP). According to the general definitions in Art.1 a taxpayer is
considered any individual or body who or which, pursuant to the provisions in the tax laws,
is required to fulfil tax obligations, including tax collectors or tax withholders of certain
taxes. The registration package to be sent to the tax office must include (i) a complete
registration form, (ii) copy of the KTP, (iii) copy of the residency notification letter.
All individuals are now required to register and obtain a tax identification number unless
their income is below the taxable threshold. Those who deliberately fail to so do face severe punishment of imprisonment of up to six years.
Tax Reform 2000 introduced a new regulation, when to register for NPWP2-. According to
this new decree an individual taxpayer, who is engaged in trade or business activities or
self-employed, is obliged to obtain an NPWP not later than one month after the business
has been carried out.
1
Those Articles, which are not further specified are those mentioned in KUdTCP.
2
DGT Decision No. KEP 516/PJ/2000 regarding The Period for Registration and Reporting of Business Activities and
Procedures for Registration and Revocation of the NPWP
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Obligation to obtain Taxable Firm Registration Number for VAT purposes
Additionally to the obligation to obtain a NPWP every firm subject to pay VAT is obliged to
report its business activities to the office of the Directorate General of Taxes to be confirmed as a taxable firm and shall be given a Taxable Firm Registration Number, Art. 2 (2)
KUdTCP
Penalties (criminal charges) for Not-Registering
Tax Reform 2000 provides excessive punishment for those, who fail to register. Those
who fail to deliberately fail to register, shall be punishable by imprisonment for a maximum
of six years and a maximum fine equal to four times the amount of unpaid or underpaid
tax, Art 39 (1) e. This regulation criminalizes thousands of company employers, which are
suspected to have deliberately not registered
2.6.1.2 Documentation Requirements
For taxation purposes individuals and legal entities, who conduct business or independent
work are required to conduct accounts and records, Art 28 (1). Books and accounts shall
include, but is not limited to a record of assets, liabilities or debts, equity, income and expenses, and sales and purchases, so that the amount of tax due can be calculated, Art 28
(4). The Director General of Taxes has further issued guidelines on keeping books of account. These general rules and regulations are complemented by regulations in the Income Tax Law, where specific regulations with regards to activation, valuation and depreciation can be found. The VAT Law further provides obligations on how to keep accounts
with regards to VAT invoices, Art 6 PPN.
Exemptions from Book Keeping Requirements
Individual Taxpayers can be exempted from keeping books and accounts, Art 28 (2) and
(11) i.e individual taxpayers, who conduct business or independent work and whose annual gross turn over is not more than Rp.600.000.000,00, Art 28 (2), Art 14 (2) PPH as
well as individual taxpayers, who are exempted to file tax returns. However those, who are
exempted are still required to keep records as evidence.
Penalties
Those who deliberately fail to keep books of accounts or records, or do not show available
accounts and thus causing losses to the revenues of the state shall be punishable by imprisonment for a maximum of six years and a maximum fine equal to four times the
amount of unpaid or underpaid tax, Art 39 (1) e.
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2.6.1.3 Requirements to Self Assessment
According to the Self Assessment Scheme each Taxpayer is required to assess his own
tax liability, which includes (i) computing the own tax liability, (ii) filing tax returns, and (iii)
perform installment payments. A tax return lodged by a taxpayer is now assumed to be in
accordance with the law unless the DGT can prove it is incorrect.
Properly Compute Own Tax Liability
This self-assessment scheme implies that taxpayers have the obligation of computing
their own tax liability. It also implies that in general no official assessment is necessary.
Art. 33 a PPh stipulates this obligation with regards to the Income Tax and Art. 9 (1) and
Art. 10 (1) provide this for the VAT and the Sales Tax on Luxury Goods Law.
Administrative Fines and Penalties- If the taxpayer computes the tax liability incorrectly,
he may correct the tax return, but has to pay 2 percent interest on the amount of tax underpaid. If these inaccuracies arise from disclosure an administrative fine of 50 per cent
of the amount tax underpaid shall be paid., Art. 8. Art. 38 and Art. 39 stipulate criminal
provisions for filing incorrect tax returns (deliberately or because of negligence), ranging
from imprisonment from up to one year and a fine (negligent) to a maximum imprisonment
of six years (deliberately).
File Tax Returns
The collection of Taxes is stipulated in KUdTCP and in the respective tax laws, a.o. Income Tax Law and VAT. As Indonesia has adopted a self-assessment system. Taxpayers
have to register with the tax offices, and present a periodic or annual Tax Return on relevant taxes, in particular Income Tax and VAT, Art 3. In general terms all withholding taxes
as well as VAT returns have to be filed monthly, Income Tax returns yearly.
The form and the content of the tax return is stipulated in various decrees, issued by the
Minister of Finance e.g. Form and Content of Tax Returns ( 534/KMK.04/2000) and decrees by the Directorate General of taxes, e.g. KEP 517/PJ/2000 (Where to submit), KEP
518/PJ/2000 (Submission by post), KEP 519/PJ/2000 (When to submit), KEP
520/PJ/2000 (Form and content for individual taxpayer).
New and Revised Annual Individual Income Tax Return Forms
DGT Decree No. KEP-542/PJ./2001 introduces new and revised forms for annual individual income tax returns. As of 2001, there are two types of annual individual income tax
returns: The simple annual tax return (Form 1770-S) can be only used by individuals who
receive income from one source (e.g., employees who work for one employer, government employees and pensioners). If individual taxpayers receive other income (e.g., interest income from banks), they cannot use this form. Annual income tax return (Form 1770
and its attachments)- this form has been revised, the main additions being that the taxpayer must report details on and provide a summary of the assets and liabilities of the individual and his family at the end of the year.
Corporation tax returns for the financial year ended December 31 must be filed by the following March 31 or within three months of an alternate balance date. In principle, an extension will be granted if a request is lodged before March 31 and the provisional final tax
payment (on an estimated basis) is made by March 25. The extension period can range
from three to six months.
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At the end of every financial year, a balance sheet and an income statement must be
drawn up in accordance with Indonesian accounting principles or a recognized equivalent.
The Minister of Finance may grant complete or partial exemption from any of these obligations. A tax return is normally accompanied by audited financial statements and selected
additional supporting schedules.
Exemptions- According to decree 535/KMK.04/ 2000 issued by the Ministry of Finance
those taxpayers are exempted from filing a tax return, if the net income is not more than
the non-taxable income set forth in Art. 7 PPh. Taxpayers experiencing liquidity problems
or a force majeur situation may apply to pay outstanding tax assessments and underpaid
annual corporate or employee income taxes through installments or even to have them
postponed for up to a maximum 12 months, DGT Decree No. KEP-325/PJ/2001. However, the application must be submitted no later than 15 days before the payment deadline, unless the taxpayer can prove that the time limit is not sufficient.
Administrative Fines and Penalties- If a tax return is not filed or not filed within the time
limit, an administrative fine of Rp. 50.000 for the periodic, and Rp. 100.000 for annual tax
return is filed, Art. 7. If the taxpayer because of negligence fails to file or files an incorrect
or incomplete tax return, or attaches incorrect information, which then may cause losses
to the revenues shall be punished by imprisonment for the maximum of one year and a
maximum fine equal to twice the amount of unpaid or under-paid tax, Art. 38.
Perform monthly installment payments
Specific regulations in the Income Tax Law, Art. 20, 25 PPH provide that monthly installment payments on the estimated tax should be paid either by other parties (withholding)
or by the taxpayer himself. Under the prepayment system, companies and individuals
make monthly instalment prepayments of their income tax. Individual resident taxpayers
who do not have any business activities and all of those whose regular income has been
subject to Art. 21, 22, 23 and final withholding taxes, are not required to perform monthly
instalment payments. The basis for the taxpayer's monthly payment is one-twelfth of the
amount of the tax due as reflected in the previous year's return, after deduction of the
amount of tax withheld by other parties. Where tax assessments have been issued within
the last two years, they are used as the basis. A procedure is available to apply for reduction of these instalments or for exemption or relief from the various other forms of withholding tax referred to below. A request for a reduction of the monthly instalments can be
filed after the fourth month of a tax year, provided the projected income tax liability for the
year is less than 75 percent of the income tax liability used as the basis to calculate the
current month's instalment.
Where prepayments exceed the total tax liability for the year, a tax refund should be requested. Prepayments may not be offset against other current tax obligations, but they
may be used to satisfy outstanding prior-year tax assessments. The law provides that a
decision on the request for a refund should be made within 12 months from the date of
filing of the return on the basis of an investigation or audit. If after 12 months no decision
has been made, the full amount of the refund is granted. If the refund is not realized within
13 months from the date the return was filed, interest at 2 percent per month accrues to
the taxpayer on the amount owed by the government.
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The obligations of taxpayers to file, compute, and pay are as follows:
¾ Payment must be made by the 15th day of the next month.
¾ The forms supporting the monthly payment must be lodged with the State
Treasury by the 20th day of the next month.
¾ Within three months after the end of a tax year, the taxpayer is required to calculate final tax liability, i.e., to calculate the amount of tax that has already
been prepaid and to determine the balance of tax still payable.
¾ When the final calculation and payment are completed, a tax return must be
filed with the Tax Service Office three months after the year-end unless an extension has been granted.
¾ If previous prepayments fall short of the amount due, the taxpayer is obliged to
pay the difference to the State Treasury by the 25th of the third month following
the tax year-end.
Under Tax Reform 2000 the DGT has been given the ability to approve a “tax period” of
up to three month. This is a significant advantage as tax payers who obtain approval for a
tax period in excess of a standard month will be able to file fewer tax returns.
2.6.2 Mechanisms of Tax Authorities to Examine Tax Compliance
The self-assessment system implies that tax authorities are not further checking or investigating the filed tax returns. The amount of taxes, which has been computed by the taxpayer, is considered to be correct. Unlike in many other countries no official decree to determine the final tax liability is issued after the tax return has been filed (tax assessment).
However, KUdTCP provides instruments for tax authorities to examine compliance with
tax laws and regulations by the following instruments: (i) verification, (ii) audit, (iii) investigation of tax offences.
2.6.2.1 Verification
Verification has the slightest impact on the tax payer and it is a series of steps undertaken
to evaluate completeness in filing tax returns and its attachments, including the accuracy
of writing and calculations. Based on the result of an verification of a tax return tax authorities issue a tax collection notice, if an underpayment of tax arising from errors in writing
and/or calculating has been noticed.
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2.6.2.2 Audit
Audits are carried out by the tax authorities to directly test tax compliance. Audits are conducted either on selection or are foreseen by the law. The Income Tax Law and VAT set
out specific regulations, when an audit should be carried out. Art 28 A PPH for example
stipulates, that an overpayment of Income Tax shall only be refunded after a audit has
been carried out. The same holds true for the refund of VAT. DGT Circular No. SE03/PJ.7/2001 dated 6 June 2001) elaborates on the circumstances that can result in a tax
audit, including:
¾ Refund requests for overpaid annual corporate, employee or individual tax;
¾ Annual corporate tax returns showing a loss position;
¾ Obtaining information from a third party which requires further investigation;
¾ In the case of telecommunications joint operations (KSOs) or consortiums;
¾ Requests to refund VAT or compensate it against the following period;
¾ Applications for changes in tax year;
¾ Applications to revalue fixed assets;
¾ Applications for qualified mergers, business expansions, acquisitions or liquidations;
¾ Applications for tax ID cancellation, or change of business address causing a
change of Tax Office;
¾ Failure to file annual corporate or individual tax return;
¾ Conducting own construction activities when the VAT obligations are assumed not
to have been lfilled properly;
¾ Failure to file annual employee income tax returns for 2 consecutive years;
¾ Failure to report monthly VAT returns for 3 consecutive months;
¾ The existence of data, including on land and building tax and/or land and building
title transfer duty,that may lead the Tax Office to expand the base of taxpayers and
/or VAT enterprises; and
¾ Applications for VAT centralization.
Per definition in Art 1 an audit is a series of activities to seek gather and process data and
information in the context of monitoring compliance based on provisions of the tax laws.
For audit purposes the audit official shall be provided with an audit warrant to be shown to
the taxpayer. The procedures for the conduct of an audit are set out in a government
regulation that, inter alia, requires the taxpayer to be advised of the auditor's findings and
the basis of any proposed assessment. The taxpayer is required to respond thereto.
An audit must include a formal "closing conference" at which taxpayers sign a document
stating whether they agree with the Tax Office’s proposed adjustments. Tax auditors have
full access to taxpayers' records. Normally, taxpayers are selected for audits on the basis
of a stratified approach, i.e., a mixture of specified obligatory audits (e.g., refunds) plus a
random sample of taxpayers. The audit priorities may vary from time to time. On occasion,
special audit task forces are formed for particular audit assignments (e.g., large taxpayers,
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industry sectors). The DGT has issued guidelines for simple tax office audits, which
should be completed within 4 to 6 weeks. The new procedure highlighted in these guidelines is that simple tax office audits must be concluded by holding a closing conference
between the taxpayer and the tax auditors to allow an opportunity for the taxpayer to respond to the tax auditors’ findings. Previously, tax auditors could issue assessments in
simple tax office audits without holding closing conferences (DGT Decree
No.741/PJ./2001.
Tax Refunds
After Tax Reform 2000 the DGT will be able to make “advance refund payments” (i.e. prior
to a tax audit), DGT Decree No. KEP-406/PJ./ 2001). However, Taxpayers will need to
meet certain criteria, which include acceptable a.o. taxpayers compliance, no outstanding
tax liability, an unqualified opinion in an audited financial statement by a public accountant. Careful attention is recommended in applying the advance refund process since a
100% penalty will be imposed if a subsequent tax audit results in an underpaid tax position.
Tax Assessment after Audit
After the completion of an audit an official decree that specifies the tax liability is issued,
called Tax Assessment. It appears in the the following forms: Tax Under-payment Assessment, Additional Tax Underpayment Assessment, Tax Overpayment Assessment, or
a Nil Tax Assessment. A tax underpayment assessment is a decree that specifies the
amount of tax due, amount of tax credit, amount of underpayment of basic tax due,
amount of administrative penalties and amount still to be paid. Additional Tax Underpayment Assessment is a decree that specifies the amount of tax due over and above that
which has already been assessed. Tax Overpayment Assessment is a decree that specifies the amount of tax overpaid where the amount of tax credit exceeds the tax due or
which should not have been due. Nil Tax Assessment is a decree that specifies the
amount of tax due as being equivalent to the amount of tax credit, or that there is no tax
due and no tax credit.
2.6.2.3 Investigation
The Investigation of criminal offences has the highest impact on the tax payer and is stipulated in Art. 44, and will be lodged if the taxpayer is suspected to have committed an
criminal offence as set out in the tax laws.
2.6.3 Legal Protection
Besides general rules the KUdTCP sets forth regulations with regards to the legal protection against administration of tax laws, namely in Chapter V “Objections and Appeals”. A
Taxpayer may file objection only on account of the various forms of Tax Assessment and
withholding or collection by a third party. After the Director General of Taxes has issued
an Objection Decision, a taxpayer may lodge an appeal.
Appeals-From January 1, 1998 Indonesia has implemented a new Tax Court for the settlement of tax disputes. With this new law, effective 12 April 2002, a new Tax Court (Pengadilan Pajak-PP) will replace the currentTax Dispute Settlement Agency (Badan Penyelesaian Sengketa Pajak-BPSP), however it will essentially operate as BPSP does. The
major changes in this new law is that taxpayers will only have to pay 50% of he tax as-
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sessed as per tax assessment letter before the Tax Court will hear its case (previously
100% of the ax assessed had to be paid).
2.6.4 Summary: penalties, surcharges, interests and fines
In general, tax offences shall not be prosecuted after 10 ten years have passed from the
time tax is due.
¾ 2 percent interest per month on underpaid tax, calculated from the time the tax is due
until the date of issuance of a tax assessment, but with a maximum of 24 months, i.e.
48%.
¾ A 50 percent surcharge on income tax underpaid in a tax year, where the taxpayer:
ƒ Fails to submit a tax return after the Tax Service Office has issued a written summons; or
ƒ Does not maintain proper books and records or does not provide adequate
information during a tax audit, meaning the amount of the tax due cannot
be determined.
¾ A 100 percent surcharge on income tax under withheld, under collected or under deposited (relating to third-party withholding), where a taxpayer:
ƒ Fails to submit a tax return after the Tax Service Office has issued a written summons; or
ƒ Does not maintain proper books and records or does not provide adequate
information during a tax audit, meaning the amount of the tax due cannot
be determined.
¾ A 100 percent surcharge on VAT and sales tax on luxury goods underpaid, where the
taxpayer:
ƒ Uses an incorrect amount of VAT overpayment as an offset; or
ƒ Incorrectly applies the 0 percent VAT rate.
¾ A 100 percent surcharge on the tax underpaid if additional tax assessments are issued
by the Indonesian Tax Office as a result of previously undisclosed facts found within
ten years after the tax is due.
¾ A fine for either late reporting or not reporting in accordance with requirements of a
periodic tax return (Rp. 50,000) or annual tax return (Rp. 100,000).
¾ A 2 percent fine on the value-added tax base for failure to register as a VAT entrepreneur (PKP).
¾ A 2 percent fine on the value-added tax base for a PKP that fails to issue tax invoices
or issues incomplete tax invoices.
¾ A 2 percent fine on the value-added tax base for a non-PKP that issues tax invoices.
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3 FINDINGS AND ISSUES FOR DISCUSSION
3.1 Tax Policy
Tax Policy in Indonesia has undergone radical changes with three major tax reforms In
the last eighteen years. The latest, in the year 2000, focused among others on reducing
tax exemptions and aiming at more tax justice, e.g. reducing the tax burden for those, who
earn less and increase the tax burden for those, who earn more. However, SMEs seem
not to be part of a specific tax policy within the Indonesian policy framework. They, either
indirectly or by coincidence profit from the most recent tax reforms. This becomes obvious
as SMEs are still not defined for tax policy purposes, tax exemptions for small companies
vary within and among the tax laws, and direct incentives are granted not to defined group
like SMEs but other target groups (mostly businesses in defined areas). Based on the
fragmented and often informal nature of SMEs it is difficult for the Government to take
measures tailored for SMEs. The following findings and issues for discussions attempt to
view the taxation system through the eyes of SMEs so that the impact of the taxation system becomes more apparent and thus can serve as a basis for future tax policy.
3.1.1 Exemptions and indirect Incentives for SMEs
From the review of the tax system it has become apparent that SMEs benefit from exemptions to reduce their administrative burden (e.g. bookkeeping requirements). Tax incentives are not granted directly, however SMEs do often profit indirectly, like reduced tax
burdens for sole proprietors. An overview of these exemptions/incentives is illustrated in
the table on the next page.
Figure 9: Exemptions / Incentives
Exemptions/ Incentives
Regulation
Requirement
SME Eligibility
Simplification calculating Net Art 5 (1)a PPH, Art
Income by using Net Calcu- 28 (2), KUdTCP
lation Norm
Annual gross turnover less than
Rp.600,000,000
SME Classification
Exemptions from keeping
books and accounts
Art, 14 (2), PPH, Art
28 (2) KUdTCP
Annual gross turnover less than
Rp.600,000,000
SME Classification
Exemption from filing Tax
Returns
Decree Minister of
Finance
535/KMK.04/2000
If net-income is not
more than nontaxable income set
forth in Art. 7 PPH
SMEs with losses in
start-up phase
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Exemptions/ Incentives
Exemptions from VAT liability
Regulation
SME DEVELOPMENTTA
Requirement
SME Eligibility
Art 1, Decree Minister Have to opt
of Finance, No
Goods:
552/KMK.04/2000
gross turnover not
exceeding
360,000,000
SME Classification
Services:
gross turnover not
exceeding
180,000,000
Reduced Income Tax Rate
from Income received from
the sale of participation/
shares in SMEs
Art 4 (2)k PPH Decree of Minister of
Finance
250/KMK.04/1995)
Net sales
Venture
not more
Capital
Company than Rp.
5 million
Joint
Venture
with SME
in specific
sectors
Not
traded in
stock exchange
SME Classification
Final Tax Regime for construction remains for “Small
Construction Companies”
GR No 140/2000
Contract of not more
than Rp. 1 billion +
certifies as SME
SME Classification
(SME entrepreneur
certificate)
Reduced tax burden through Art 7 PPH
higher tax free allowance
(see also Table 5)
Individual Tax Payer
SME as Sole Trader
Reduced tax burden through Art 17 PPH
new Progression Zones (see
also Table 5)
Individual Tax Payer
SME as Sole Trader
Reduced Income (Withhold- GR 4, 1995
ing) Tax Tariff for the income
received from the transfer of
capital participation
Venture Capital
Company
Net sales not more
than Rp. 5 million,
Decree of Minister of
Finance
250/KMK.04/1995)
Joint Venture with
SME in specific sectors
Not traded in stock
exchange
No Income Tax due for income from dividends
Art 4 (3) PPH
Dividends received
from investment in
joint venture with
SME
Net sales not more
than Rp. 5 million,
Decree of Minister of
Finance
250/KMK.04/1995)
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3.1.2 Non Existence of SME Definition
The table above shows that the Tax System recognizes the SME sector as part of its policy. However, the varying definitions create confusion who should benefit from the simplifications, exemptions, and incentives. As a consequence SME policy may not reach the
desired target group. For example, a company, which is VAT able because its gross turn
over is more than Rp. 360,000,000 may not benefit from the simplification calculating the
net income by the Net Calculation Norm (threshold up to 600,000,000 gross turnover) as it
has to use a proper bookkeeping system anyway to compute its VAT liability and will do
so for its net-income.
3.1.3 Foreseen direct Tax Incentives often irrelevant for SMEs
Tax incentives, which are specifically foreseen to reduce the tax burden are often irrelevant for SMEs. Tax policy in Indonesia focuses its incentive mechanism either on supporting (foreign) direct investment in specific areas and/ or industries or the debtrestructuring sector.
Tax Incentives relating to Direct Investment
In order to boost direct investment in Indonesia, Article 31A PPh provides certain tax incentives to taxpayers investing in certain business sectors and/or certain areas. such
tax facilities take the form of:
¾ reduction of net income to a maximum of 30% of the invested amount (investment
allowance);
¾ accelerated depreciation and amortization;
¾ extended loss compensation period to a maximum of 10 years; and
¾ 10 % dividends tax under Article 26 PPh, subject to applicable Double Tax Treaty.
Tax Incentives relating to Debt Restructuring
Under Article 31B debt restructuring organized through a special institution established by
the government, namely the Jakarta Initiative Task Force can be granted the following facilities:
¾ forgiveness of debt;
¾ transfer of property to the creditor for the settlement of debts;
¾ debt-equity swap.
Case against direct tax incentives
Instead of unitarily focusing on how to grant to what target group which incentive Government should focus its strategy on how to create a conducive tax environment.
Firstly, support measures, like incentives- insulate businesses from competitive pressures and
perpetuate inefficiency, low innovation and uncompetitive ness. Today’s perception is that
there is only limited justification for direct government involvement in the market place and limited prospects for its effectiveness. This broad conclusion is reflected by international experience that investors (both domestic and foreign) are more likely to be persuaded to invest by
strong economic fundamentals, i.e. the investment environment, than by the likelihood of receiving short-lived tax incentives.
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Secondly, tax incentives erode the clear standard or broad based, low-rate tax system,
which serves the ends of both economic efficiency and stability. And if there is no institutional set-up like a Fiscal Analysis Unit- to determine the consequences of incentives on
revenue foregone and other economic effects those programs can become highly costly
and have no effects. The availability of generous incentives both for foreign and domestic
companies, which could be found to a much bigger, extend prior to 1984 significantly narrowed the base for base of the corporate income tax. Not only were the incentives expensive in terms of foregone revenues, they were generally ineffective in achieving their central purpose of attracting beneficial investments to Indonesia in general and to backward
regions within the country in particular.1
Thirdly, from the point of tax administration, the case against tax incentives is overwhelming. When there are hardly any resources to deal with the growing demand of registering
taxpayers and providing tax registration numbers, the effective administration of tax incentives can hardly be guaranteed. As in Indonesia where in 1998 only 10 percent
(1.787.4492) of 17,1 million recorded enterprises3 were registered as tax subjects, tax administration seems not to be capable to effectively manage additional tax incentive
schemes.
3.1.4 Regional Autonomy
Regional autonomy has increased taxation rights of local Governments. The impact of local taxes on SME require an in-depth review. Attention should be given to the potential to
harmonize, as far as possible, formal and material requirements (e.g. recording duties,
calculation of the tax base) for local and national taxes, as well as the material impact on
SME´s business decisions of such local taxes as advertisement tax and road tax.
3.2 General Observations on the Income Tax Law
Progressive Taxation
The principles of how income tax is levied in Indonesia are based on a progressive taxation system. This type of system is used in many countries across the globe and relies on
the principle “the greater earnings the higher the tax brackets. In general tax tariff as well
as the tariffs within the tax brackets (progression) can be considered as reasonable. Depending on the business form the tax tariffs applied can be highly discriminative as individuals in the business form of sole traders have to pay considerable less Income Tax as
corporations. On the other hand sole traders are allowed to have the same deductions
and can apply for the same tax privileges as other corporate business forms.
Tax Brackets
Recently the tax brackets for individual taxpayers i.e. for most of the SMEs, which operate
as sole-traders, have been raised from three to five (see also under chapter 2.2). Together with reduced tax tariffs for lower income and increasing the tax free allowance this
policy action should have a positive growth rate for SMEs as a majority operates in the
lower brackets.
1
Investment Tax Incentives: Recent Indonesian Experience and Options for Reform, Harvey Galper and Geoffry Walton,
Barents Group, http://www.barents fiscal.or.id.
2
Home page Directorate Genderal for Taxes (DGT) in the Ministry of Finance, http://www.pajak.go.id/profil/grafik_statistik
3
1996 Economic Census, Profile of Establishment with Legal Entity, Badan Pusat Statistic, Jakarta, 1996
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Self Assessment vs. Withholding Scheme and Obligatory Audit
In order to reduce the interface of Government with the taxpayer Indonesia has introduced
yet another best practice (besides introducing progressive taxation and tax brackets),
namely the self-assessment of the tax liability through the self assessment scheme. This
allows SMEs to file its tax returns without any interaction with the tax collector, thus reducing the burden of official harassment and corruption. However, this principle has been reduced to an mere exemption by withholding schemes and the obligatory audit in the case
of an income tax refund.
The numerous withholding schemes (see also Table 3) transfer the preliminary settlement
of tax liability to a third party (e.g. a bank or the employer), thus introduces a second level
of interaction and a burden of additional hassle. Withholding income tax for a tax payer
also bears additional cash flow problems and costs as the tax withheld is often nothing
more than an installment payment on the final tax liability, additional to the monthly installment payments on Income Tax. Those “two” down-payments may often exceed the
final tax liability, especially in times of losses.
But not only is the withholding scheme disadvantageous for the one, whose tax is withheld
but also for the one, who has to withhold the tax. This obligation set out by law requires
additional book-keeping capacities, which often is a disadvantage for sub-contracting.
services under a withholding scheme.
Further, the obligatory audit in the case of an income tax refund also reflects the general
mistrust of tax authorities towards taxpayer, who by law is entrusted to compute his own
tax liability. The following statement by Senior Director of the tax office supports the thesis
that self assessment is not the rule but the exemption: “Before we trust you (the taxpayer)
we must thoroughly audit the hell out of you to see if you deserve our trust”.1
Different Taxation Individual and Incorporated Taxpayer
The recent Tax Reform provides more benefits to the individual tax payer (sole-proprietor)
compared to incorporated firms thus grants extensive indirect tax incentives to SMEs. As
they mainly operate as sole traders they are taxed less than before the Tax Reform 2000
and significant less compared to other business forms, which operate as legal bodies.
Even though SMEs are treated different as tax subjects they can deduct the same expenses as corporate bodies. For example, by reducing the yearly profit by carrying the
loss of one year forward over a period of the next 5 years (“loss carried forward”) SMEs
are given a powerful tax design instrument to reduce their tax burden. Further, incentives
to encourage venture capital businesses as well as protective measures towards holding
structures have been introduced from which SMEs indirectly profit.
1
“Historical Perspective of Indonesian Tax Reform”, Philip J. Shaw, Mercantile Athletic Club, 15 March, 2001
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3.3 Specific Observation on Income Tax: SME´s operating as
sole traders pay less Income Tax than corporations
In Comparison, SMEs as sole traders have to pay less income tax than corporations. With
the introduction of steeper progression zones and the fact that corporations are not allowed to deduct tax-free allowances, these business forms carry a higher income tax burden after the tax reform than before. This finding is revealed in the figure below. However
this statement only holds true for a yearly income of less than Rp. 400 million.
Figure 10: Comparison income tax tariffs between Sole Trader and corporations
Comparison of income tax tarrifs
Tax payable
150
100
50
0
0
100
200
300
400
500
Net profit
Sole trader
Corporation
What is not reflected in the above mentioned figure is the fact that those entrepreneurs,
which operate through a legal entity (corporation) are further taxed on the personal level, if
they receive income from dividends. As a consequence business income is taxed twice on
company level (corporate tax) and personal level (personal Income Tax). This double
taxation of business income leads to an even higher tax burden. 1
1
The Indonesian Tax Law partially reduces the burden of double taxation by tax exempting the income from dividends in a
few specific cases. These cases are named in Article 4 (3) PPh, for example dividends paid to a holding, shares of profits
received from a joint venture with a small and medium sized enterprise.
Tax Reform 2000 has introduced new tax exemptions for dividends-repealing others.
For example, art 4. (3) PPh stipulates that dividends are not subject income tax if
¾
the dividend is paid out from the reserved retained earnings; and
¾
in the case that the receiving party is a limited liability company or State/Regional owned enterprises, it must own at
least 25% of the paid up capital of the company paying the dividends and have an actual business other than owning
shares in the company paying the dividends.
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3.4 General Observation on the VAT and Sales Tax on Luxury
Goods Law
The computation of VAT is a complex issue due to the dependence of buyer/seller as well
as the application the tax credit method. As SMEs do not have developed finance and account departments the monthly calculation of sales tax liabilities takes a lot of their valuable time. On top the obligatory audits in the case of VAT refund creates additional hassle. To avoid these hindrances VAT Law foresees a tax exemption for small companies.
Other exemptions in the VAT Law are numerous. These exemptions are provided for certain tax subjects (small companies), tax objects (transfer of specific goods and services),
tax tariff (for exports) as well as for the final tax liability (VAT is either not collected or born
by the Government). However, exemptions can cause disadvantages, as they cause misfunctions in the VAT system. One practical result is that small companies, which are VAT
exempted have higher acquisition costs as input tax which is paid on the acquisition of
taxable goods may not be credited.
According to the definition of small-scale enterprises in the VAT Law many of the SMEs
are not VAT able since their annual turnover would be not more than Rp. 380.000.000.
However being VAT exempt under the current VAT Law could cause the following constraints. Besides higher input prices it may cause a disadvantage for sub-contractors
(linkage) in those cases were small, tax-exempted firms sell intermediate goods to larger, VAT able companies. Producers purchasing goods for further manufacturing are able
to deduct VAT paid on intermediate goods from their tax liability on the transaction of the
final product. Not to loose this credit a large VAT able enterprise is more likely to by from
a sub-contractor, which is VAT able than from one, which is not, discouraging efforts to
buy from smaller enterprises.
Disincentive to conduct proper books- a VAT exempt enterprise is more likely not to
conduct proper books or other instruments of proper management. The VAT Law introduces bookkeeping requirements as a condition to keep track of input and output VAT. If
there is no incentive for keeping proper books –like being part of the transaction circle of
VAT able firms -, SMEs are not encouraged to conduct the necessary requirements to
comply with these laws.
Lengthy and burdensome refund procedures-The obligatory audit before a VAT credit
gets refunded often results in burdensome and lengthy refund procedures. The audit and
as well as pre audit formalities creates room for (i) corruption and (ii) bearing cash flow
costs, as SMEs have to access others sources of cash during the period refunds are.
Even though a new decree has been issued by the Ministry of Finance
(541/KMK.04/2000) to speed up the refund procedure, the provision that credit shall be
deposited not later than 15 month after the tax period is still considered to be far too long.
As the tax creditor has no instrument to enforce his right for a “speedy” refund, this obligation towards tax authorities remains a mere wish.
Discriminatory effect of the Sales Tax on Luxury Goods- the Sales Tax discriminates
specific sectors (e.g. hotels, restaurants, computer services, film industries) without considering exemptions for small and medium sized enterprises. Those could be considered if
a small companies wishes to buy a computer.
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3.5 Perceived Corruption
“Customs, traffic police, and tax offices are highly corrupt”, states a survey conducted by
the Partnership of Government Reform. 1 The Partnership of Governance Reform is a collaboration between international organizations, including World Bank Asian Development
Bank, United Nations, the Indonesian Business Community, and non-governmental organizations. The survey itself was conducted through face to face interviews with 650 officials, 1,250 households and 400 business executives in 14 provinces.
One example for in-transparent and corrupt enforcement is the tax compromise, which
characterizes the informal relationship between the taxpayer and the tax collecting authorities. Under this system the actual collected tax is determined by bargaining compromise between the taxpayer and the tax official rather than enforcing the actual tax liability.
The origin of this practice may lie in the lack of tax information, the proper socialization of
tax laws, unreliable taxpayer’s records and books as well as the shortage of qualified staff
in the tax department. Depending on the bargaining power of the taxpayer, the compromise results in either underpayment of the actual legal liability or an overpayment. Favoring those, who have high bargaining power, discriminating those, who have low bargaining power.
3.6 Low Tax Compliance and Knowledge
According to quantitative survey2, which has been conducted by ADB TA SME Development in the cities of Semarang and Medan, tax compliance can be considered as low
While some 80% of SME qualify for VAT, only 37% have paid VAT during the last year.
12% of SME think they have to pay VAT, but do not pay, while more than 30% do not
even know that they are in principle subject to VAT.
For income tax, it is more difficult to make respective assessments, as the survey did not
collect information on enterprise profit. However, based on turnover per employee, it can
be estimated that ratios for income tax should be similar to those for VAT. For land and
building tax, tax payment is far higher at 84%.
Figure 11: Tax Compliance according to ADB TA Survey
ADBSME DEVELOPMENTTA
Taxes paid
84
91
77
42
Land and Building Tax
45
37
Income Tax
TOTAL
1
39
MEDAN
36
39
VAT
SEMA RANG
The Jakarta Post, Friday, October 19, 2001
2
The survey covered a total of 482 small and medium enterprises. Micro enterprises were excluded from the survey. The
sample covers a broad sectoral mix comprising manufacturing and processing, services, wholesale, retail, restaurants
and accommodation, transport, storage and communication.
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ADB
SME DEVELOPMENTTA
Tax Compliance among SMEs could be lower- However, the following findings suggest
that tax compliance among SMEs could be much less than the findings of the survey may
indicate.
Ratio between SMEs recorded and Income Tax forms received: According to data base of
the General Directorate of Tax (GDP) between 1995 and 1998 an average of 850.000 tax
forms were received from individual tax payers (excluding employees). Assuming there
are 14,5 million SMEs recorded as individual taxpayers this would lead to a compliance
ratio of 6%.
Figure 12: Income Tax Forms received between 1995-1997 1
Individual Tax Payer (not
counted employees)
Income Tax Forms received
Per cent of estimated 14, 5
Million (according to 1999
figures)
1995
819,460
6%
1996
874,066
6%
1997
895,411
6%
Ratio between SMEs recorded and Tax Registration Numbers issued- Further, up to the
year 2001 2.068.623 Tax Registration Numbers have been issued to individuals performing business without a legal body.2 A compliance ratio of 14% (Tax Registration Numbers
in 2001 compared to 14,5 million SMEs) reveal that tax registration compliance among
SMEs has improved but is still low.
Non-compliance has in turn three effects. Firstly, tax Administration cannot be effective if
non-compliance is widespread. Secondly, entrepreneurs, who do not comply with legal
requirements, face those problems, which are commonly encountered by the informal sector like:
¾ Difficulties to access credit, formal services and information, and
¾ Tax officers, which predate on businesses due to their insecure legal status.
Thirdly, formalization ensures a basic standard, which can be relied upon among business
community in terms of common business ethic as well as self-discipline like the requirement to conduct proper books.
Thus, through its mechanisms of registrations, audit, enforcement, and collection, tax administration must accord high priority attention to significant non-compliance with the law.
On the other side, the survey carried out for the Partnership of Economic Growth states
that 56% of the business respondents were willing to pay additional taxes if corruption
could be eliminated, and of those willing to do so over half were prepared to pay more
than 5% of company revenues toward eliminating unofficial payments. This finding provides an idea of the interlocking relationship between tax compliance and corruption.
1
Home page Directorate Genderal for Taxes (DGT) in the Ministry of Finance, http://www.pajak.go.id/profil/grafik_statistik
2
Home page Directorate Genderal for Taxes (DGT) in the Ministry of Finance, http://www.pajak.go.id/profil/grafik_statistik
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ADB
SME DEVELOPMENTTA
3.7 Observations on General Rules and Procedures
SMEs have comply with complex and complicated requirements set out in various tax
laws, which include: registration requirements, documentation requirements, and selfassessments requirements. These requirements are often coupled with criminal charges.
Penalties for late filing are minimal if tax has been paid, but are significant for nonregistration, late payment and failure to withhold. Revised registration requirements have
been introduced and foresee severe punishment for non-compliance. This punishment
seems to be excessive considering that SMEs are often not aware of the extent of
changes in tax laws. Government should be aware that tax authorities have not sufficient
resources to deal with the growing demand of registering taxpayers and providing tax registration numbers. As in Indonesia where in 1998 only 10 percent (1.787.4491) of 17,1 million recorded enterprises2 were registered as tax subjects. A refocus of tax crimes and
penalties to those enterprise who on purpose evade tax payments should be considered,
while providing amnesty rules for those SME, which did not comply with tax regulations
because of lack of information or knowledge. This would firstly, help SME to return into the
net of tax-payers, secondly reduce the possibility for tax authority to manipulate SME to
their cost.
There is still some confusion about whether taxpayers who are not required to file monthly
returns must nonetheless make monthly tax payments. As a reminder, if the net-income is
not more than non-taxable income set forth in Art. 7 PPH, a tax payer is not required to file
a tax return. As of February 2001, Tax Offices seem to hold the view that taxpayers
should make monthly payments even though they are not required to file monthly returns.
This view should be carefully reconsidered as installment payment bare a severe impact
on the cash flow, especially on SME. In case a final liability is not evident, SME should not
be burdened with requirements such as installment payments on a non-existing tax liability.
Indonesia strives to enhance tax compliance among SME. However, in this process adequate balances have to be found between public interest to reduce tax evasion and the
need for simple formal requirements in order not to place undue administrative and economic requirements on SME.
1
Home page Directorate Genderal for Taxes (DGT) in the Ministry of Finance, http://www.pajak.go.id/profil/grafik_statistik
2
1996 Economic Census, Profile of Establishment with Legal Entity, Badan Pusat Statistic, Jakarta, 1996
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ADB
SME DEVELOPMENTTA
4 AGENDA FOR RECOMMENDATIONS
4.1 Recommendations to prepare the ground for Tax Policy Improvements
¾ Tax procedures as well as the overall administrative climate still require a thorough
review. Establish a working group to review the tax regulations and procedures on
SME with specific attention towards further simplification of administrative & formal requirements. Under participation of private stakeholders ( small and medium businesses, preasure groups, tax consultants) initiate further studies with regards to the
specific tax perception of SMEs e.g. corruption, tax compliance, tax knowledge, and
further hampering tax regulations.
¾ Regional autonomy has increased the taxation rights of local Governments. Therefore,
the impact of local taxes requires a in depth review/ assessment. Attention should be
further given to the potential to harmonize, as far as possible, administrative procedures, judical supervision, and formal requirements (e.g. recording duties, calculation
of tax base).
¾ Indonesia strives to enhance tax compliance among SME. In order to improve tax
compliance and bring SME back into the formal sector initiate an awareness campaign
among SME to provide information on the taxation system. A user friendly information
package published in Indonesian could inform about business taxation and thus raise
the understanding about the taxation system and procedures.
¾ Indonesia still lacks a SME definition, not only in the taxation system. A unified SME
definition is essential to achieve a focused SME tax policy for all taxes.
¾ The withholding schemes, obligatory audits for tax refunds, and lengthy tax refund
procedures have a negative impact on a –in principle- well balanced tax system. In
general withholding schemes should be reduced and the obligatory audit be replaced
by a modified verification and reconsidered as an exemption rather than a rule. As a
first step small corporations should be exempted from withholding requirements and
those withholding schemes, which have a negative impact on sub-contracting are to
be replaced by the self-assessment scheme.
4.2 Recommendations to improve the impact and awareness of
Income Tax
¾ The awareness of the positive effects triggered by the Income Tax Reform has not
been sufficiently enhanced. Government should make use of this positive image and
send out the message that SME are the winners of the Income Tax Reform by significantly reducing their tax burden, granting them new indirect tax incentives, as well as
exemptions and simplifications. It is therefore recommended to advocate this positive
impact on SME.
¾ Reconsider the general view on the practice to install monthly down payments even
though tax payers are materially not liable to pay Income Tax. A shift in this practice
would help to reduce the negative impact on the cash flow, especially for SME.
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ADB
SME DEVELOPMENTTA
¾ Currently, the majority or SME are heavily criminalized merely they do not register. To
build a golden bridge to the formal sector amnesty rules for those, which did not comply with registration requirements because of lack of information or knowledge should
be provided. Further, it is recommended to generally exclude those in the low income
strata (yearly gross income of not more than Rp. 50.000.000) from all tax requirements, also the requirement to register.
4.3 Recommendations to include SME in the VAT System
¾ Transactions of a VAT exempted company could be generally rated zero per cent (instead of being tax exempt). As another option the non-collection of VAT is recommended. As a consequence VAT is not imposed on the transaction, while small companies are still allowed to credit the input tax. This in turn would create an incentive to
comply with tax regulations, conducting books etc., as well as creating an incentive for
a higher request for tax consulting services.
¾ Small enterprises could be exempted from Sales Tax purchasing one computer for
business purposes.
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