14 Constraints in the Taxation System - Kementerian … · · 2013-10-23SME CONSTRAINTS IN...

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: [email protected]

ADB SME DEVELOPMENTTA

I

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


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2.3.5 Computing of VAT Liability ..................................................................................25

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


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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


IV

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


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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


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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 En-tity, 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 Geoffry Walton, Bar-ents Group

Investment Tax Incentives: Recent Indonesian Experience and Options for Reform http://www.barents fiscal.or.id.

J.S. Uppal Taxation in Indonesia, Gadjah Mada University Press, 2000


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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.

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 ad-ministrative standards like book-keeping requirements, tax self assessment, and pe-nalities. 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.

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 in-creasingly important province and district taxes are not part of this report as well as custom taxes, retributions, and contributions.

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 stream-lined 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 re-quired.

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

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 middle-income taxpayers.


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Tax Rate Until 2000 Tax Rate from 2001 Progression Zone (Taxable

Income in Million Rp.) Individual and Corpo-

rate Taxpayers Individual Taxpayer

Corporate Taxpayer

0-25 5% 5% 25-50 15% 10% 10%

50-100 15% 15% 100-200 25% over 200

30%

35% 30%

Tax free allowances Taxpayer Rp. 1,728,000 Rp. 2,880,000 Spouse with own income Rp. 1,728,000 Rp. 2,880,000 Spouse without own income Rp 864,000 Rp. 1,440,000 Each other dependant (max. 3) Rp 864,000 Rp. 1,440,000 Maximum Tax Free Allowance (2 earners, 3 dependants) Rp. 6,048,000

Rp. 10,080,000

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 with-holding tax for construction services.

Value Added Tax/ Sales Tax on Luxury Goods

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.

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 proc-ess 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:

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

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 trans-fer value). Now, both Income Tax and Transfer of Land and Building Tax are cumula-tively 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 li-ability


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General Rules and Procedures of Taxation

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 un-friendly. These obligations range from requirements to (i) register, (ii) keep proper documentation (books and records, (iii) to self-assess the tax liability. The self-assessments of tax liability include requirements to file a tax returns, compute own tax liability, perform down payments.

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 im-poses 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 af-ter a mandatory audit has been conducted (exception see above), thus torpedoing the self-assessment scheme and increasing the interference with tax authorities.


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Findings

The SME Sector can draw on numerous exemptions/ indirect incentives. After the re-view 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 exemp-tions. An overview of these exemptions/incentives is illustrated in the table below.

Exemptions/ Incen-tives

Regulation Requirement SME Eligibility

Simplification calculat-ing Net Income by us-ing Net Calculation Norm

Art 5 (1)a PPH, Art 28 (2), KUdTCP

Annual gross turnover less than Rp.600,000,000

SME Classification

Exemptions from keep-ing 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 non-taxable income set forth in Art. 7 PPH

SMEs with losses in start-up phase

Exemptions from VAT liability

Art 1, Decree Minister of Finance, No 552/KMK.04/2000

Have to opt

Goods: gross turnover not ex-ceeding 360,000,000

Services: gross turnover not ex-ceeding 180,000,000

SME Classification

Reduced Income Tax Rate from Income re-ceived from the sale of participation/ shares in SMEs

Art 4 (2)k PPH De-cree of Minister of Finance 250/KMK.04/1995)

Venture Capital Company

Joint Venture with SME in specific sectors Not traded in stock ex-change

Net sales not more than Rp. 5 million

SME Classification

Final Tax Regime for construction remains for “Small Construction Companies”

GR No 140/2000 Contract of not more than Rp. 1 billion + certi-fies as SME

(SME entrepreneur cer-tificat)

SME Classification

Reduced tax burden through higher tax free allowance

Art 7 PPH Individual Tax Payer SME as Sole Trader

Reduced tax burden through new Progres-sion



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Exemptions/ Incen-tives

Regulation Requirement SME Eligibility

Reduced Income (Withholding) Tax Tariff for the income received from the transfer of capital participation

GR 4, 1995 Venture Capital Com-pany

Joint Venture with SME in specific sectors

Not traded in stock ex-change

Net sales not more than Rp. 5 million, Decree of Minister of Finance 250/KMK.04/1995)

No Income Tax due for income from dividends

Art 4 (3) PPH Dividends received from investment in joint ven-ture with SME


Non Existence of SME Definition- The table above shows that the varying definitions create confusion who should benefit from the simplifications, exemptions, and incen-tives. As a consequence SME policy may not reach the desired target group.

Foreseen direct tax incentives in the Tax System are often irrelevant for SMEs as their focus are certain business sectors and/or promoted areas.

Withholding Taxes and obligatory audits are torpedoing the (best practice) self-assessment scheme, thus increasing interaction with government and tax collectors causing bureaucratic hassle, official harassment and corruption.

SME operating as sole traders are paying less Income Tax than corporations and less than before Tax Reform 2000.

VAT exemptions may cause disadvantages for sub-contractors (linkages) and are an disincentive to conduct proper books.

VAT Law discourages SME to opt for VAT liability as no further SME tailored simplifi-cations for entering the VAT system are provided.

Lengthy and burdensome refund procedures are discouraging SME to enter the VAT System.

The Sales Tax on Luxury Goods discriminates specific sectors without considering ex-emptions for small and medium sized enterprises.

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.

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.

According to a quantitative survey, conducted by the ADB TA SME Development, tax compliance and knowledge among SME is relatively low.


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Recommendations

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 re-quirements. Under participation of private stakeholders ( small and medium busi-nesses, 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.

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 proce-dures, judicial supervision, and formal requirements (e.g. recording duties, calculation of tax base).

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.

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.

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.

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 signifi-cantly 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.

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.

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 com-ply 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 require-ments, also the requirement to register.

Transactions of a VAT exempted company could be generally rated zero per cent (in-stead of being tax exempt). As another option the non-collection of VAT is recom-mended. As a consequence VAT is not imposed on the transaction, while small com-panies 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.


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Small enterprises could be exempted from Sales Tax purchasing one computer for business purposes.


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VI. EXECUTIVE SUMMARY BAHASA INDONESIA

Dampak khusus Undang-undang Perpajakan bagi UKM mendorong para Pembuat Kebi-jakan 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.

Sistim Perpajakan (Legislasi dan Administrasi) seringkali menghambat pertumbuhan UKM atau memaksa mereka ke sektor informal. Undang-undang dan peraturan (legis-lasi) mempunyai dampak terhadap alur kas akibat pembayaran pajak akan tetapi juga menyebabkan biaya tinggi untuk memenuhi persyaratan (high compliance costs) me-lalui standardidasi administrasi yang resmi seperti kewajiban memelihara pembukuan yang rapi, menilai-sendiri pajak (tax self assessment) dan denda. Seringkali ham-batan-hambatan tersebut bukan saja terkait dengan undang-undang perpajakan tetapi juga akibat perilaku birokrasi. Interaksi dengan birokrasi seringkali berbentuk penyua-pan, prosedur berbelit dan proses yang tidak transparen.

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.

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 mem-pertimbangkan sejumlah besar pembebasan bagi UKM, insentif tidak-langsung, dan fasilitas umum yang sudah tersedia maka tidak diperlukan lagi menciptakan (tamba-han) insentif perpajakan bagi UKM.

Walaupun telah di-upayakan keras untuk mengurangi persyaratan resmi maupun be-ban 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

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%. Den-gan kombinasi kenaikan pembebasan pajak bagi wajib pajak perorangan, maka re-formasi telah mengurangi secara signifikan beban pajak golongan wajib pajak ber-penghasilan rendah dan menengah.


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Tarip Pajak hingga 2000

Tarip Pajak mulai 2001 Pajak Progresif (Pendapatan

Kena Pajak – Rp.juta.) Wajib Pajak Peroran-gan dan Badan

Wajib Pajak Perorangan

Wajib Pajak Badan

0-25 5% 5% 25-50 15% 10% 10%

50-100 15% 15% 100-200 25%

Diatas 200

30%

35% 30%

Pembebasan Pajak Wajib Pajak Rp. 1,728,000 Rp. 2,880,000 Isteri dengan penghasilan Rp. 1,728,000 Rp. 2,880,000 Isteri tanpa penghasilan Rp 864,000 Rp. 1,440,000 Tanggungan (max. 3) Rp 864,000 Rp. 1,440,000 Pembebasan Pajak max. (2 bekerja, 3 tanggungan) Rp. 6,048,000

Rp. 10,080,000

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 rele-van dengan UKM ialah kenaikan tarip pajak pemotongan/pemungutan final penda-patan 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 penghasi-lan jasa-jasa professional, termasuk konsultansi hukum, pajak, teknis dan mana-jemen, dari 6% hingga 7,5% dari pendapatan kotor; dan pajak pemotongan baru jasa-jasa konstruksi.

Pajak Pertambahan Nilai / Pajak Penjualan Barang Mewah

Reformasi Pajak tahun 2000 menaikkan ambang batas bagi perusahaan kecil se-hingga 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.

Terdapat sejumlah besar perbaikan dalam persyaratan resmi perpajakan. Dalam un-dang-undang pajak yang baru semua wajib pajak badan dapat klaim pengembalian setiap bulan apabila pemasukan kredit melampaui pengeluaran dalam sebulan. Apa-bila 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.

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

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 undang-undang memberikan pembebasan, diskon, dan pengurangan kewajiban pajak.

Peraturan Umum dan Prosedur Perpajakan

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 mem-bayar pajak termasuk kewajiban mengisi surat pernyataan pajak, menghitung sendiri kewajiban membayar pajak, dan membayar pajak.

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. Difi-hak 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

Bagi sector UKM terdapat sejumlah besar pembebasan / insetif tidak-langsung. Sete-lah pengkajian-ulang Sistim Perpajakan, tampak bahwa sektor kecil-menengah meru-pakan bagian dari suatu kebijakan perpajakan umum yang bermaksud mengurangi beban mereka melalui insetif tidak-langsung dan pembebasan. Suatu risalah pembe-basan / insentif dijabarkan dibawah ini.

Pembebasan/ Insen-tif

Peraturan Persyaratan Perysaratan UKM

Penyederhanaan perhi-tungan Pendapatan Net dengan Norma Perhi-tungan Net

Ayat 5 (1)a PPH, Ayat 28 (2), KUdTCP

Omzet tahunan kurang dari Rp.600,000,000

Klasifikasi UKM

Pembebasan membuat pembukuan dan cata-tan

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

Bila penghasilan net tidak melampaui penghasilan tidak-kena pajak sesuai Art. 7 PPH

UKM dengan kerugian saat mu-lai bisnis

Pembebasan dari ke-wajiban PPN

Ayat 1, Keputusan Menkeu No. 552/KMK.04/2000

Dapat memilih

Barang: omzet gross tidak melampaui 360,000,000

Jasa-jasa: omzet gross tidak melampaui 180,000,000

Klasifikasi UKM

Pengurangan Tarip Pa-jak Pendapatan yang diterima dari penjualan partisipasi / saham di UKM

Ayat 4 (2)k PPH Keputusan Menkeu 250/KMK.04/1995)

Perusahaan Modal Ven-tura

Joint Ven-ture dengan UKM di sek-tor spesifik Tidak diperda-gangkan di bursa effek

Penjualan Net tidak melam-paui Rp. 5 juta

Klasifikasi UKM

Perhitungajn Pajak Fi-nal untuk konstruksi bagi “Usaha Kecil Kon-struksi”

PP No 140/2000 Kontrak kurang dari Rp. 1 milyar + kwalifikasi sebagai UKM

(Sertifikasi UKM)

Klasifikasi UKM

Pengurangan beban pajak melalui peningka-tan pembebasan pajak

Ayat 7 PPH Wajib Pajak Perorangan UKM sebagai Pedagang

Pengurangan beban pajak melalui tarip Pa-jak Progres baru

Ayat 17 PPH Wajib Pajak Perorangan UKM sebagai Pedagang


XVIII

Pembebasan/ Insen-tif

Peraturan Persyaratan Persyaratan UKM

Pengurangan Pengha-silan (Pemotongan) Tarip Pajak bagi penghasilan dari trans-fer partisipasi modal

PP 4, 1995 Perusahaan Modal Ven-tura

Joint Venture dengan UKM dalam sektor spe-sifik

Tidak diperdagangkan di bursa efek

Penjualan Net kurang dari Rp. 5 juta. Keputusan Menkeu No. 250/KMK.04/1995)

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)

Tidak ada Definisi UKM. Tabel diatas menunjukkan bahwa berbagai definisi mencipta-kan kebingungan siapa yang akan menikmati penyederhanaan, pembebasan, dan in-sentif. Akibatnya kebijakan UKM mungkin tidak akan mencapai kelompok sasaran yang diinginkan.

Insentif pajak langsung dalam Sistim Perpajakan seringkali tidak relevan bagi UKM karena fokus terhadap beberapa sektor bisnis dan/atau bidang yang di-promosikan.

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.

UKM sebagai pedagang murni membayar lebih sedikit Pajak Pendapatan daripada perusahaan besar dan sebelum Reformasi Pajak tahun 2000.

Pembebasan PPN dapat mengakibatkan kerugian bagi sub-contractor (hubungan jar-ingan bisnis) dan tidak merupakan insentif untuk membuat pembukuan yang baik.

Undang-undang PPN tidak mendorong UKM untuk memilih kewajiban PPN karena tidak ada penyederhanaan yang cocok bagi UKM dalam sistim PPN.

Prosedur pengembalian pajak yang panjang dan melelahkan tidak mendorong UKM untuk masuk dalam sistim PPN.

Pajak Penjualan Barang Mewah membuat diskriminasi beberapa sektor tanpa mem-pertinbangkan pembebasan bagi Usaha Kecil dan Menegah.

UKM harus memenuhi persyaratan yang berbelit dan rumit dalam berbagai undang-undang perpajakan, termasuk: persyaratan pendaftaran, persyaratan dokumentasi, dan persyaratan penilaian sendiri. Persyaratan ini seringkali terkait dengan sanksi pi-dana berat sehingga UKM dapat menjadi mangsa yang empuk bagi pejabat perpaja-kan yang ganas.

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.


XIX

Menurut hasil suatu survey kuantitatif yang dibuat oleh ADB TA SME Development, pengetahuan dan kewajiban pajak diantara UKM relatif rendah.

Rekomendasi

Prosedur perpajakan maupun iklim umum administratif masih memerlukan pengkajian yang mendalam. Disarankan untuk membuat suatu kelompok-kerja untuk mengkaji-ulang peraturan dan prosedur perpajakan bagi UKM dengan perhatian khusus terha-dap penyederhanaan persyaratan administratif & formal yang berlanjut. Dengan par-tisipasi 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 hambatan-hambatan peraturan perpajakan.

Otonomi regional telah meningkatkan hak perpajakan pemerintah daerah. Oleh karena itu dampak pajak lokal memerlukan pengkajian mendalam / penilaian. Selan-jutnya perlu memperhatikan potensi harmonisasi, sejauh mungkin, prosedur adminis-tratif, supervisi peradilan, dan persyaratan formal (mis., kewajiban pencatatan, men-ghitung dasar pajak, dsbnya).

Indonesia berusaha keras untuk meningkatkan ketaatan pajak diantara UKM. Untuk meningkatkan keataatan pajak dan membawa UKM kembali ke sector formal seyogy-anya dimulai dengan suatu kampanye kesadaran untuk menyediakann informasi ten-tang sistim perpajakan diantara UKM. Seyogyanya dibuat suatu perangkat informasi yang akrab UKM yang memuat informasi perpajakan bisnis dan dengan demikian da-pat meningkatkan pemahaman tentang sistim dan prosedur perpajakan.

Indonesia belum memiliki suatu definisi UKM, bukan hanya dalam sistim perpajakan. Suatu kesatuan pemahaman definisi UKM sangat penting untuk membuat suatu kebi-jakan UKM yang focus dalam semua hal perpajakan.

Skema pajak pemotongan/pemungutan, wajib-audit untuk pengembalian pajak, dan prosedur pengembalian pajak yang berbelit mempunyai dampak negatif – secara prin-sipiil – terhadap sistim perpajakan yang berimbang. Secara umum skema pemoton-gan/pemungutan seyogyanya dikurangi dan wajib-audit diganti dengan suatu modifi-kasi verifikasi dan dipertimbangkan kembali sebagai suatu pembebasan ketimbang suatu peraturan tetap. Sebagai suatu langkah awal, usaha kecil seyogyanya dibebas-kan dari persyaratan pemotongan/pemungutan dan skema pemotongan yang mem-punyai dampak negatif terhadap sub-kontrakting sebaiknya diganti dengan skema penilaian sendiri.

Kesadaran dampak positif yang diperoleh dari Reformasi Pajak Pendapatan belum cukup ditingkatkan. Pemerintah seyogyanya memanfaatkan citra positif ini dan men-yebar berita bahwa UKM mendapatkan manfaat dari Reformasi Pajak Pendapatan se-cara 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.

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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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 dis-arankan untuk mengecualikan golongan strata berpenghasilan rendah (penghasilan kotor setahun kurang dari Rp. 50.000.000) dari semua persyaratan perpajakan terma-suk kewajiban mendaftarkan diri.

Perusahaan yang dibebaskan dari PPN seyogyanya diberi klasifikasi nol percent (ketimbang dibebaskan dari pajak). Sebagai alternatif lain maka disarankan untuk ti-dak 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 per-mintaan terhadap jasa konsultansi perpajakan.

Usaha kecil dapat dibebaskan dari Pajak Penjualan apabila membeli sebuah kom-puter untuk penggunaan dalam bisnis.


XXI


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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 Medium-Term 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 introduc-ing 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 Enforce-ments 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 re-port 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 Fi-nance, 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 benefi-cial to save taxes, and (iii) on the accounting system of a business (bookkeeping require-ments).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 compli-cated 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 impor-tant 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 incen-tives. 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 defi-ciencies. 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 para-digm. 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 fol-lows 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:

The 1983 Tax reform consolidated numerous individual laws and decrees into a sin-gle, 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 main-tained. Finally, the reform introduced a Law on General Rules and Procedures of Taxation in order to harmonise assessment and collection of various taxes.

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 tax-able 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, proce-dural 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 Proce-dures of Taxation.

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:

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 sepa-rate Corporate Tax Law. The Income Tax Law applies to individuals and corporations alike, although applying different income tax tariffs on both groups of taxpayers.

Value Added Tax (VAT) is levied on commercial transactions in Indonesia, excluding those of the financial sector.

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.

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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Tax of Transfer of Land and Building was introduced in 1997. 5% transfer tax is lev-ied 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.

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%).

Province and district taxes: A number of taxes are raised on the level of the prov-inces 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% (de-

pending 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 divi-dends, 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 mecha-nisms 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 cred-ited against actual tax due as per Tax Return or Tax Assessment Notice. Others, how-ever, 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

Custom Taxes- Governmental charges imposed on goods at the time they are im-ported into a state; and

Retributions- Usage fees for specific purposes and services, such as parking or mar-ket fees, or airport tax.

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 analyz-ing 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 tax-payers, 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, ac-cording to Article 2(1) PPh, subject to income tax:

An undivided estate is defined as a unit in lieu of the beneficiaries.

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 part-nership (firma);

• Cooperatives;

• Legal entities established and owned by the government, including those in le-gal forms as defined by Law No. 12/1967 on co-operatives, including Perusa-haan Perseroan or Persero (state owned limited liability company), Perusahaan Umum or Perum (public enterprise), Perusahaan Jawatan or Perjan (govern-ment agency), and Perusahaan Daerah or Perusda (local state owned com-pany);

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 sub-jects 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 es-tablished 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 citi-zen 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, includ-ing income derived from his country of origin.

A permanent establishment is defined as establishment used by a non-resident tax sub-ject 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 fo-cuses 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 eco-nomic 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,

Income from employment and services,

Lottery prices and awards,

Business profit,

Gains from the sale or transfer of property,

Income from rent, dividends, interest and royalties,

Gains from property revaluation, foreign exchange fluctuation and debt cancellation, and

insurance payments received.

Non- taxable sources of income Not taxable according to Article 4 Paragraph 3 PPh are

Aid and donations, including those received in kind for services, e.g. from 'food for work' projects, and gifts received by small businesses

Gifts received from direct blood relatives, and inheritances,

Payments received from life, health, accident, or education insurance, and

Profit shares received from a limited partnership without shares (C.V.), affiliation, as-sociation, 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 ven-ture-capital company as share of the profit of a joint venture with a small or medium-


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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:

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 divi-dends and has a core business activity other than owning shares in the com-pany paying the dividends; or

• the dividends are received by a venture capital from investment in or joint ven-tures with small and medium enterprises (SME). SME in this respect are de-fined as a company that has annual net sales not more than Rp 5 billion (Minis-try of Finance Decree 250/KMK.04/1995)

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 estab-lished by the government, namely the Jakarta Initiative Task Force, are now tax exempt. The tax exemption covers gains from:

forgiveness of debt;

transfer of property to the creditor for the settlement of debts; and/or

debt-equity swaps.


9

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 ma-terials, 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

Profit distribution, including dividends;

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;

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;

Expenses on non-taxable objects such as gift, aid, donations, inheritances, and pre-miums 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);

Salaries paid to members of an association, firma or limited partnership, as profit dis-tribution from such bodies is tax-exempt on the level of the shareholders;

Income Tax;

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 dis-tribution of product samples deductible as expenses to earn and secure income, or non-deductible, because such samples are gifts and donations? What about business lunches and receptions? No Government Regulation or Ministerial Decree clarifying these ques-tions 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 inven-tory revaluations carried out according to commercial accounting standards, e.g. revaluat-ing 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.


10

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, ex-pand, 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 acti-vated. 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 ac-counting.

Besides tangible assets, businesses also have to activate expenditure to acquire intangi-ble 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 de-velopment 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 re-lated 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 depre-ciation 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:

Straight-line depreciation, where a fixed percentage is applied annually to the as-set’s acquisition cost, or

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

Depreciation/Amortization Rates Type of As-set

Useful Life in years Straight Line (percent of his-

torical acquisition cost) Reducing Balance (percent

of opening book value)

Movable and Intangible Assets Category I 4 25% 50% Category II 8 12,5% 25% Category III 16 6,25% 12,5% Category IV 20 5% 10% Buildings Permanent 20 5% - Non Perma-nent

10 10% --


11

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 in-ternational 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 use-ful 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 depre-ciation 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 out-datedness 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 activ-ity and region. The respective ordinance of the DG Taxation (Kep – 536/PJ/2000) distin-guishes 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 ap-plied. 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 (exclud-ing 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 re-spect to tax deductibility:

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.

Benefits in Kind: Deductibility of expenses for food and drinks provided by the em-ployer 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.


12

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 de-preciation anymore.

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).

Depreciation as tax incentive: In order to boost direct investment in Indonesia, Arti-cle 31A PPh of the old law provided a general clause allowing the government grant-ing 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 sec-tors 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:

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

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 tax-payer whose spouse does not have own income.

• an additional amount of Rp.1, 440,000 (before Rp. 864,000) for any blood-related 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.

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.


13

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 dis-tribute more proportionate tax burdens among different groups of taxpayers. The main features of the new structure are:

Introducing separate tax tariffs for individual and corporate taxpayers;

Reducing tax rates for lower income brackets;

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

Tax Rate Until 2000 Tax Rate from 2001 Progression Zone (Taxable In-

come in Million Rp.) Individual and Corpo-

rate Taxpayers Individual Taxpayer

Corporate Taxpayer

0-25 5% 5% 25-50 15% 10% 10%

50-100 15% 15% 100-200 25% over 200

30%

35% 30%

Tax free allowances Taxpayer Rp. 1,728,000 Rp. 2,880,000 Spouse with own income Rp. 1,728,000 Rp. 2,880,000 Spouse without own income Rp 864,000 Rp. 1,440,000 Each other dependant (max. 3) Rp 864,000 Rp. 1,440,000 Maximum Tax Free Allowance (2 earners, 3 dependants) Rp. 6,048,000

Rp. 10,080,000


14

Individual taxpayers A before-after comparison yields that the increase in the top tax rate for individual taxpay-ers 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 re-duced 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. 100-200 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 Re-form 2000

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 be-low 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.

0

50

100

150

200

0 50 100 150 200 250 300 350 400 450 500 550 600Net Income (Rp. Million)

Tax

Paya

ble

(Rp.

Mill

ion) After 2000 Tax

Reform

Before 2000 TaxReform


15

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 in-come, corporations in the highest income bracket enjoy a tax relief of Rp. 9 million, inde-pendent of net income.

Figure 4: Income Tax Payable by Corporate Tax Payers, Before and After the Tax Re-form 2000

2.2.7 Withholding Taxes Indonesian income tax is to a considerable extent collected through a system of withhold-ing 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:

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 in-come 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 in-come bracket. Both articles in conjunction are the legal base of final withholding taxes. This legal construction raises considerable concern. Since withholding proce-dures and final tax rates are defined in Government Regulation instead of in the In-come Tax Law itself, legislative control over key elements of the tax system is re-moved, 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.

0

50

100

150

200

0 50 100 150 200 250 300 350 400 450 500 550 600Net Income (Rp. Million)

Tax

Paya

ble

(Rp.

Mill

ion)

After 2000 TaxReform

Before 2000 TaxReform


16

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.

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 cer-tain 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, irre-spectively 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 arti-cle 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 credit-able could not be established.

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 con-nection with the use of property, and consultancy and other services rendered by cor-porate taxpayers.

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 offi-cials 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 collect-ing 'exit tax' from business and leisure travellers.

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.


17

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 ex-ternal collection. However, some withholding tax rates were revised, including

Increasing the final withholding tax rate on interest income from deposits and sav-ings from 15% to 20%;

Increasing the final withholding tax rate on Rentals of Land and/or Buildings from 6% to 10%

Reverting the withholding tax on interest income from deposits paid by coopera-tives from creditable to final withholding, while leaving the withholding rate unchanged at 15%;

Withdrawing/ limiting the final tax of 4% on consulting income and increasing the effec-tive withholding tax rate ( now creditable) on fees for professional services, includ-ing legal, tax, technical and management consultancy, from 6% to 7,5% of gross in-come;

Increasing the effective withholding tax rate (creditable) on fees for drilling and sup-porting services to the oil & gas and mining sectors from 4,5% to 6% of gross in-come;

Introducing a new withholding tax for construction services.

Table 3 provides more specific insight into the various kinds of tax withholding and collec-tion 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 under-taken, be incomplete or partly outdated. This concerns in particular tax withholding for in-put 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 as-sessment and collection in Indonesia.


18

Figure 5: Overview Withholding Taxes

Activity / Income source

Tax subject Tax rate and base

Character Withholder/ Collector

Excemptions Tax Law/ Regula-tion

Interest & discount amortization on traded bonds

Non-bank Le-gal body

(except pen-sion funds)

15% of gross income

Final Bank Art. 4 (II) PPH in conjunction with GR 139/2000

Sale of traded bonds

Non-bank Le-gal Body (ex-cept pension

funds)

0.03% of gross transac-

tion value

Final Stock Ex-change

Art. 4 (II) PPH in conjunction with GR 139/2000

Sale of listed shares

Resident Tax-payer

0.1% of gross transaction

value



Sale of founder's shares in listed com-panies

Resident Tax-payer (except

Venture Capital Companies)

5% +0.1% of gross transac-

tion value



Sale of shares in non-listed SME

Venture Capital Companies

0,1% of gross transaction

value

Final Venture Capi-tal Company

itself


Sale or transfer of land and buildings

Resident Tax-payer

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 ap-proving the transfer /

Treasurer in case of gov-ernment pur-

chase

Not applica-ble to inheri-tance, gifts to blood rela-tives and so-cial organiza-tions, sale to the Govern-ment in public interest, and transfer val-ues below Rp. 60 million


Interest on bank depos-its and sav-ings

Non-bank Resident Tax-

payer (except pen-sion funds)

20% of gross income

Final

Individual Taxpayers with total annual income

below tax free allow-ance may apply for

refund with DGT

Bank Not applica-ble to savings below Rp. 7,5 million, and savings with housing banks.


Income from Work

Individual Tax-payer

Tax Rates Art 17 applied on Gross Income

Creditable Employee Art 21 PPH

Pensions Individual Tax-payer

Pension re-ceived taxed

at regular tariff

Creditable Pension fund or compara-

ble body

Article 21 PPh


19





Services Resident Taxpayers

15% of esti-mated net

income, de-termined as

percentage of gross income. See Table 4 below for de-

tails

Creditable Legal body paying the service fee

Art. 21(1) PPh for individual taxpayers, Art. 23(1)c.2 PPh for bodies, both in con-junction with DGT Guidelines

Supply and services rendered to government agents

Resident Taxpayers

15% of esti-mated net

income (1,5% of gross in-

come)

unclear Government agents

Not applica-ble to ser-vices speci-fied in DGT guidelines

Art. 22, 23(1)c.2 PPh

Import Resident tax-payers

7.5% of CIF value (2.5% with import

license)

unclear Customs of-fices

Art. 22 PPh

Trade in Cigarettes

Resident Taxpayers

0.15% of the on the exise stamp price

final Cigarette manufacturer appointed as tax collectors

Art. 22 PPh, DGT Decree No. KEP-529/PJ/2001

Trade in Automotives

Resident Taxpayers

0.45% of the tax base for

VAT purposes

unclear Manufacturer Art. 22 PPh

Purchase of Steel

Resident Taxpayers

0.3% of the tax base for

VAT purposes

unclear Steel manufacturer

Art. 22 PPh

Purchase of cement

Resident Taxpayers

0.25% of the selling price

unclear All Cement manufacturer

Art. 22 PPh

Trade in Sugar

Resident Taxpayers

Rp. 380/ 100 kg for distribu-

tors, Rp. 270/100 kg. for wholesal-

ers

unclear BULOG (The State Logis-

tics)

Art. 22 PPh

Trade in flour

Resident Taxpayers

Rp. 53/ box for distribu-tors, Rp. 38/

box for wholesalers

unclear BULOG (The State Logis-

tics)

Art. 22 PPh

Petrol & Kerosene trade

Resident Taxpayers

0,3% of sales price to pri-

vate distribu-tors

unclear PERTAMINA (state-owned petrol com-

pany)

Art. 22 PPh

Interest on savings with co-operatives


payer

15% of gross income

Final Cooperative Not applica-ble to savings below a level as stipulated by the MoF

Art. 23 (1) b PPh

Interest on loan repay-ment guar-antees (fi-nancial col-lateral)


payer

15% of gross income

Creditable Bank Art. 23 (1) a.2 PPh

Dividends paid by legal bodies with limited liabil-ity


payer

15% of gross income

Creditable Legal body Not applica-ble to surplus distributed by a cooperative below a level as stipulated by the MoF

Art. 23 (1) a.1 PPh


20





Royalties Non-bank Resident Tax-

payer

15% of gross income

Creditable Legal body Art. 23 (1) a.3 PPh

Construction Resident Taxpayers

4% of gross construction value (2% in

specific cases)

Creditable

Final for small com-panies be-low Rp. 1 bn. turn-

over

Legal body Art. 23 PPh in con-junction with GR 140/2000

Rent and other prop-erty income


payer

10% of gross income)

Final Legal body paying the rent

Not applica-ble to finan-cial leasing

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 Estimated Net Income (ENI), in percent of

gross income

Effective Rate (15% of ENI), in percent of

gross income

Professional services, including accounting, tax advice, management & technical consul-tancy, architecture and interior design

50% 7.5%

Brokerage 60% 9% Drilling and other services to the oil, gas and mining industries

40% 6%

Timber cutting 40% 6% Pest control & cleaning services 10% 1.5% Actuary, film dubbing / mixing 40% 6%


21

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 regis-tration 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 ex-empted 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.

Taxable goods with the gross turnover not exceeding Rp. 360,000,000.00 (three hun-dred and sixty million rupiahs);

Taxable services with the gross revenue not exceeding Rp. 180,000,000.00 (one hun-dred and eighty million rupiahs);

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 turn-over 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 reve-nue 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 entrepre-neur. 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.


22

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, plan-tation and forestry products; the produce of animal husbandry, hunting or breeding of live-stock; 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 Law/ Regulation

Tax exempted goods: - produce of mining / excavating/ drilling di-

rectly from its source - basic necessities - food beverages served in restaurants, food

stalls - money, gold bars

Art 4 A (2) PPN in conjunction with respective Government Regulations

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



23

Tax exempted imports: - goods to serve places, which are open to

the public or used for public need - 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 rela-tionship (e.g. a firm has control over another firm) the price shall be calculated on the ba-sis 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 de-cree of the MoF, No 567/KMK.04/2000, further confirms the special VAT rates for the de-liveries of certain goods or services such as travel agent (1%), courier services (1%), fac-toring (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 entrepre-neur 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 fraudu-lently 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 re-gards to exempting small enterprises from filing periodic tax returns have not been en-countered.

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, oth-erwise 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 li-abilities, audited financial statements by public accountant. However careful attention is recommended in applying the advance refund process since 100% penalty will be im-posed 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:

Name, address, and tax ID number of taxpayer delivering the taxable goods/services

Name, address, and tax ID number of buyer

Type of good/service, quantity, sales price or compensation and any discounts

VAT that has been collected

LST that has been collected

Code, serial number, and date of issuance of the invoice; and

Name, position, and signature

It should be noticed that a 2% penalty of the tax base will be imposed for defective in-voices. With regards to administration of the invoices a various decrees have been re-


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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, re-allocation 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 spe-cifically 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 im-posed additional to the VAT on private consumption of luxury goods and has been intro-duced 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) ap-ply, 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 vehi-cles (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 De-cree550/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, ce-ramics, 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. trans-fers for religious purposes.

Tax Base-The dutiable value is the higher of the transaction value or the officially-determined value and the payment must be made at the time the respective parties regis-ter 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 al-lowances 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 De-crees 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 Lux-ury 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 pro-vides regulations for penalties, interests, fines. These general rules are than further speci-fied 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 down-payments. 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 Direc-torate 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 se-vere 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 con-firmed 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 ex-penses, 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 ac-count. These general rules and regulations are complemented by regulations in the In-come Tax Law, where specific regulations with regards to activation, valuation and depre-ciation 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 an-nual 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 im-prisonment 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 un-derpaid. 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. In-come 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 rele-vant 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 de-crees 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 individ-ual 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, govern-ment employees and pensioners). If individual taxpayers receive other income (e.g., inter-est 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 tax-payer must report details on and provide a summary of the assets and liabilities of the in-dividual and his family at the end of the year.

Corporation tax returns for the financial year ended December 31 must be filed by the fol-lowing March 31 or within three months of an alternate balance date. In principle, an ex-tension 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 obliga-tions. 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. How-ever, the application must be submitted no later than 15 days before the payment dead-line, 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 install-ment 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 reduc-tion of these instalments or for exemption or relief from the various other forms of with-holding 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 re-quested. 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:

Payment must be made by the 15th day of the next month.

The forms supporting the monthly payment must be lodged with the State Treasury by the 20th day of the next month.

Within three months after the end of a tax year, the taxpayer is required to cal-culate 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.

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 ex-tension has been granted.

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 inves-tigating the filed tax returns. The amount of taxes, which has been computed by the tax-payer, is considered to be correct. Unlike in many other countries no official decree to de-termine 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) investi-gation 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 authori-ties 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 con-ducted 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. SE-03/PJ.7/2001 dated 6 June 2001) elaborates on the circumstances that can result in a tax audit, including:

Refund requests for overpaid annual corporate, employee or individual tax;

Annual corporate tax returns showing a loss position;

Obtaining information from a third party which requires further investigation;

In the case of telecommunications joint operations (KSOs) or consortiums;

Requests to refund VAT or compensate it against the following period;

Applications for changes in tax year;

Applications to revalue fixed assets;

Applications for qualified mergers, business expansions, acquisitions or liquida-tions;

Applications for tax ID cancellation, or change of business address causing a change of Tax Office;

Failure to file annual corporate or individual tax return;

Conducting own construction activities when the VAT obligations are assumed not to have been lfilled properly;

Failure to file annual employee income tax returns for 2 consecutive years;

Failure to report monthly VAT returns for 3 consecutive months;

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

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 guide-lines 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 re-spond 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 account-ant. 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 posi-tion.

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 As-sessment, 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 Underpay-ment 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 speci-fies 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 stipu-lated 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 protec-tion 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 set-tlement of tax disputes. With this new law, effective 12 April 2002, a new Tax Court (Pen-gadilan Pajak-PP) will replace the currentTax Dispute Settlement Agency (Badan Penye-lesaian 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.

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%.

A 50 percent surcharge on income tax underpaid in a tax year, where the taxpayer: Fails to submit a tax return after the Tax Service Office has issued a writ-

ten summons; or 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.

A 100 percent surcharge on income tax under withheld, under collected or under de-posited (relating to third-party withholding), where a taxpayer:

Fails to submit a tax return after the Tax Service Office has issued a writ-ten summons; or

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.

A 100 percent surcharge on VAT and sales tax on luxury goods underpaid, where the taxpayer:

Uses an incorrect amount of VAT overpayment as an offset; or Incorrectly applies the 0 percent VAT rate.

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.

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).

A 2 percent fine on the value-added tax base for failure to register as a VAT entrepre-neur (PKP).

A 2 percent fine on the value-added tax base for a PKP that fails to issue tax invoices or issues incomplete tax invoices.

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 sys-tem 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 exemp-tions to reduce their administrative burden (e.g. bookkeeping requirements). Tax incen-tives 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 Income by using Net Calcu-lation Norm

Art 5 (1)a PPH, Art 28 (2), KUdTCP

Annual gross turn-over less than Rp.600,000,000

SME Classification

Exemptions from keeping books and accounts

Art, 14 (2), PPH, Art 28 (2) KUdTCP

Annual gross turn-over 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 non-taxable income set forth in Art. 7 PPH

SMEs with losses in start-up phase


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Exemptions/ Incentives Regulation Requirement SME Eligibility

Exemptions from VAT liabil-ity

Art 1, Decree Minister of Finance, No 552/KMK.04/2000

Have to opt

Goods: gross turnover not exceeding 360,000,000

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 De-cree of Minister of Finance 250/KMK.04/1995)

Venture Capital Company

Joint Venture with SME in specific sectors Not traded in stock ex-change

Net sales not more than Rp. 5 million

SME Classification

Final Tax Regime for con-struction remains for “Small Construction Companies”

GR No 140/2000 Contract of not more than Rp. 1 billion + certifies as SME

(SME entrepreneur certificate)

SME Classification

Reduced tax burden through higher tax free allowance (see also Table 5)


Reduced tax burden through new Progression Zones (see also Table 5)


Reduced Income (Withhold-ing) Tax Tariff for the income received from the transfer of capital participation

GR 4, 1995 Venture Capital Company

Joint Venture with SME in specific sec-tors

Not traded in stock exchange


No Income Tax due for in-come from dividends

Art 4 (3) PPH Dividends received from investment in joint venture with SME



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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 pol-icy. However, the varying definitions create confusion who should benefit from the simpli-fications, 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 irrele-vant for SMEs. Tax policy in Indonesia focuses its incentive mechanism either on support-ing (foreign) direct investment in specific areas and/ or industries or the debt-restructuring sector.

Tax Incentives relating to Direct Investment In order to boost direct investment in Indonesia, Article 31A PPh provides certain tax in-centives to taxpayers investing in certain business sectors and/or certain areas. such tax facilities take the form of:

reduction of net income to a maximum of 30% of the invested amount (investment allowance);

accelerated depreciation and amortization;

extended loss compensation period to a maximum of 10 years; and

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 fa-cilities:

forgiveness of debt;

transfer of property to the creditor for the settlement of debts;

debt-equity swap.

Case against direct tax incentives Instead of unitarily focusing on how to grant to what target group which incentive Govern-ment 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 lim-ited prospects for its effectiveness. This broad conclusion is reflected by international experi-ence 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 re-ceiving 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 institu-tional 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 nar-rowed the base for base of the corporate income tax. Not only were the incentives expen-sive in terms of foregone revenues, they were generally ineffective in achieving their cen-tral 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 overwhelm-ing. 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 incen-tives 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 ad-ministration 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 lo-cal 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 taxa-tion 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. De-pending on the business form the tax tariffs applied can be highly discriminative as indi-viduals 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). To-gether 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 31996 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 reduc-ing the burden of official harassment and corruption. However, this principle has been re-duced 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 in-stallment 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 ex-penses 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 al-lowed to deduct tax-free allowances, these business forms carry a higher income tax bur-den 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

0

50

100

150

0 100 200 300 400 500

Net profit

Tax

paya

ble

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

the dividend is paid out from the reserved retained earnings; and

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 ac-count departments the monthly calculation of sales tax liabilities takes a lot of their valu-able time. On top the obligatory audits in the case of VAT refund creates additional has-sle. 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 cer-tain 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 mis-functions 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 con-straints. 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 lar-ger, 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 intro-duces 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 obliga-tion 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 con-sidering 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 col-laboration between international organizations, including World Bank Asian Development Bank, United Nations, the Indonesian Business Community, and non-governmental or-ganizations. The survey itself was conducted through face to face interviews with 650 offi-cials, 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 au-thorities. Under this system the actual collected tax is determined by bargaining compro-mise 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 compro-mise results in either underpayment of the actual legal liability or an overpayment. Favor-ing those, who have high bargaining power, discriminating those, who have low bargain-ing power.

3.6 Low Tax Compliance and Knowledge

According to quantitative survey2, which has been conducted by ADB TA SME Develop-ment 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

4237

91

39 36

77

4539

Land and Building Tax Income Tax VAT

TOTAL MEDAN SEMA RANG

1 The Jakarta Post, Friday, October 19, 2001 2The 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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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 re-ceived

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 perform-ing 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 sec-tor like:

Difficulties to access credit, formal services and information, and

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 require-ment to conduct proper books.

Thus, through its mechanisms of registrations, audit, enforcement, and collection, tax ad-ministration 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 pro-vides 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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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 self-assessments requirements. These requirements are often coupled with criminal charges. Penalties for late filing are minimal if tax has been paid, but are significant for non-registration, 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 reg-istration numbers. As in Indonesia where in 1998 only 10 percent (1.787.4491) of 17,1 mil-lion 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 liabil-ity.

Indonesia strives to enhance tax compliance among SME. However, in this process ade-quate 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 eco-nomic requirements on SME.

1 Home page Directorate Genderal for Taxes (DGT) in the Ministry of Finance, http://www.pajak.go.id/profil/grafik_statistik 21996 Economic Census, Profile of Establishment with Legal Entity, Badan Pusat Statistic, Jakarta, 1996


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4 AGENDA FOR RECOMMENDATIONS

4.1 Recommendations to prepare the ground for Tax Policy Im-provements

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 re-quirements. Under participation of private stakeholders ( small and medium busi-nesses, 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.

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 proce-dures, judical supervision, and formal requirements (e.g. recording duties, calculation of tax base).

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.

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.

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

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 signifi-cantly 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.

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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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 com-ply 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 require-ments, also the requirement to register.

4.3 Recommendations to include SME in the VAT System

Transactions of a VAT exempted company could be generally rated zero per cent (in-stead of being tax exempt). As another option the non-collection of VAT is recom-mended. As a consequence VAT is not imposed on the transaction, while small com-panies 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.

Small enterprises could be exempted from Sales Tax purchasing one computer for business purposes.

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