Tax Regulations in Indonesia

The Law on Harmonization of Tax Regulations in Indonesia (UU HPP), Law No. 7 of 2021 regulated on October 29 2021 – Nearing the end of this year, a new regulation on Tax activities in Indonesia will attract a lot of attention and questions. Starting from 2022, the taxpayers of this country must bear in mind the changes on their tax calculation.

The appearance of a tax harmonization law is a new opportunity for Indonesia, especially in getting fresh injections of funds and reducing the deficit by 2022. CORE Indonesia economist Yusuf Rendy also sees the HPP Law as an effort by the government to meet future needs. So, is the HPP Law part of structural reform on business in Indonesia? Read more.

History of the Tax Regulations in Indonesia

The Law of Harmonization of Tax Regulations will be enforced as to perform strategic policy based on the previous regulations regarding Tax in Indonesia, as such :

  1. Amendment on Law No. 6 year 1983 concerning the General Terms and Conditions on Taxation, previously amended by Law No. 16 of 2009 concerning the Stipulation on Government Regulation in Lieu of Law (PERPPU) No. 5 of 2008.
  2. Amendment on Law No. 7 year 1983 concerning the Withholding Tax, previously amended with the latest Law No. 36 of 2008.
  3. Amendment on Law No. 8 year 1983 concerning the Value Added Tax on Goods and Service and Value Added Tax on Luxurious Goods, previously amended with the latest Law No. 42 of 2009.
  4. Amendment of Law No. 11 year 1995 concerning Customs, previously amended with the latest Law No. 39 of 2007.

Forms of Indonesian Tax Reform Section           

The enforcement of the Law on the Harmonization of Tax Regulations is part of the reform process. Not only focus on administration but also impact on policy. Thus, its presence becomes a stepping stone for Indonesia to be much more stable in its economical growth moving forward.

Sri Mulyani (Minister of Finance) explained that the HPP Law provides space for Indonesia to continue developing the existing economic sector. Not only that, this is part of a form of a sustainable economy, equity, inclusiveness, and supporting human resources who can compete and have quality in the existing fields.

The existence of the HPP Law is the government’s commitment to turn the situation from a crisis into an opportunity. During the Covid-19 pandemic, she explained that many countries were affected by the domino effect of the pandemic, causing the economy to decline and income to be polluted. Whilst income is reduced, the uprising need of the country is unavoidable if there is no strategic step.

The existence of the HPP Law provides an increase in sustainable economic growth. This aspect allows the economy to be wiser and the potential for state revenues to be optimally regulated.

The world economy is declining due to a prolonged pandemic, the HPP Law is expected to be a solution to overcome these problems. So that national development will soon be realized, and produce a competitive and prosperous Indonesian nation.

Results of the HPP Law for Indonesia      

There are many significant roles from the presence of the HPP Law, the need for better data integration, and minimizing gaps that are detrimental to the state. In the opinion of the Director of the Center for Economic and Legal Studies (Gelios), he explained that the HPP Law is good news for national taxation because it forms a more focused and measurable database.

1. Number of ID cards Become Tax ID 

Creating data in one large database is indeed the dream of the Indonesian government, this is in line with the presence of the HPP Law. To simplify the process of monitoring and administrative efficiency, the Identity Number (Nomor Induk Kependudukan – NIK) will become the Taxpayer ID Number (Nomor Pokok Wajib Pajak – NPWP). This requirement only applies to individual taxpayers (Wajib Pajak Orang Pribadi – WP OP). However, business entities will have their Business Identification Number (NIB) be recognized as the Taxpayer ID Number.

Through the Director-General of Taxes at the Ministry of Finance, Suryo Utomo explained whether this policy regarding the Taxpayer ID will take effect in 2023. Focusing on 2022, the Government of Indonesia is still in the preparation stage regarding information systems and technology optimization to assist this enormous integration.

2. Value Added Tax and Taxable Income Rates

Value Added Tax Rates

The regulation clears out several sectors of goods and services from the list of taxable goods and services, previously stipulated in Law No. 8 year 1983 as detailed in below table :

Then the HPP Law will also impose increase rates on VAT of 10% to : 11% by April 2022 and 12% by the latest January 2025.

Taxable Income Rates

The Ministry of Finance website explained that the Law on the Harmonization of Tax Regulations has ratified several changes related to VAT and WHT rates. For Non-Taxable Income (PTKP) rates yearly,please see below table as reference :

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Furthermore, the stipulation of the HPP Law provides an overview of tax individuals earning (PKP) has only 2 points on change, which previously the tax layer is up to IDR 50 Million on Taxable Income, with this regulation it is now up to IDR 60 Million (with no changes on the rates) and the Taxable Income for Income with layer more than IDR 5 Billion will be taxed 35 percent. These changes are part of social justice for all Indonesian people, especially in the government’s alignment with individual MSMEs and corporate MSMEs. In contrast to individual taxes, the HPP Law provides attractive concessions for foreign investors doing business in Indonesia. Because, there is a significant determination that Corporate Income Tax is only 22 percent while previously the rate for Corporate Income Tax is on 28 percent, even the lowest for the Asian region. The focus and goal are to maintain an increasingly better investment climate, it’s predicted that in the following years Indonesia will receive a lot of foreign injections, so it is not surprising that the Corporate Income Tax is given lower thanks to this regulation, which for business owners and operators, providing it feels like a mutually beneficial form. The difference of across the world are seen in the Average Income Tax of ASEAN (22.17%), OECD Countries (22.81%, American countries (27.16%), and G-20 countries (24.17%).

3. Carbon Tax      

Delivering the impact of sustainable economic progress, Indonesia has a significant role in realizing a healthy economy and reducing exhaust emissions that affect climate change. Through the HPP Law, the government provides a tax on carbon in the steam power plant (PLTU) sector and coal sector. The fare is at minimum of Rp. 30,000 per kilogram of carbon dioxide equivalent (CO2e).

Other than that the Carbon Tax will also be calculated from the purchase of goods consisting carbon, by the end of calendar year on the activities producing carbon emission in specific amount or by other time as will be furtherly stipulated by the Government or based on the Government Regulation.

The process is gradual, must be seen and adjusted from the green economy roadmap. However, those whose activities are related to the participation of carbon emission trading, carbon emission development and/or other mechanism stipulated through the governed regulated law in the filed of environment, might have the access to carbon tax reduction.

The terms related to carbon tax will be enforced on April 1 2022.

4. Tax Amnesty volume II      

The results of the ratification of the HPP Law explain that the Tax Amnesty program or the voluntary disclosure program is only valid for six months. The implementation itself will take place from 01/01/2022 – 30/06/2020. Thus, the Indonesian government provides an opportunity for taxpayers (WP) to report and disclose voluntarily.

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Advantages of Presence UU HPP 

1. The state budget of Indonesia (APBN)      

Having a good and measurable state income, providing a much healthier APBN effectiveness. Especially in the functions of distribution, allocation, and stabilization to create a just and prosperous society. This will affect the management of state spending that is more qualified and financing that is more attractive, innovative, and sustainable.

2. Investment Trends Will Increase Positively      

The determination of the company income tax at 22 percent makes Indonesia an attractive field to invest in South-East Asia market. Of course, this is an advantage for both parties in investing, because Indonesia is one of the lowest income tax earners for the ASEAN region and several other countries.

3. The Right Steps to Overcome the Crisis      

The COVID-19 pandemic has affected the economic sector, a disaster that has lurked for almost two years and is still ongoing today has hit many countries. The government’s role in ratifying the HPP Law is a strategic and rapid part of recovering from these haunting problems.

What is the Biggest Impact of Businessmen Regarding the Enforcement of the HPP?

The focus of the Indonesian government is to invite local and foreign investors to start investing in Indonesia. The enactment of the HPP Law provides an increasingly attractive and competitive global economic climate. Especially with the tax reform, all state products can be managed and regulated optimally.

On the other hand, the Government of Indonesia takes part in reducing the impact of global warming, thereby providing quality and sustainable economic growth. That way, the business sector gets maximum profit and can develop its business direction optimally in the future.

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