An income tax is a tax imposed by the government on income generated by individuals and businesses within its jurisdiction. Income tax is a source of revenue for the government. They are used to fund public services, pay government obligations, and provide goods for the citizens. Most countries employ a progressive income tax in which higher income earners pay a higher tax rate compared to their lower-income counterparts.

Indonesia’s Tax System

In Indonesia, there is a variety of taxes which companies, investors, and individuals need to pay. Taxes in Indonesia include corporate income tax, withholding tax, individual income tax, international tax agreements, value added tax, luxury-goods sales tax, customs and excise, tax concessions, and land and building taxes. Indonesia’s tax system is based on the 1945 Indonesian constitution which states that tax is to be imposed on all Indonesian citizens, foreign nationals, and residents who have lived in Indonesia for at least 183 days of the most recent tax year. Generally, one who has resided there for less than 120 days does not pay tax except on Indonesian-sourced income. However, some tax treaties supersede this. Tax treaties deal with the taxation of foreign-sourced income for services that are rendered in Indonesia which are usually taxed if performed for more than 120 days depending on the kind of treaty. Tax treaties apply to resident and non-residents alike.

The taxation system in Indonesia gives recognition to the economic reality of the poorer citizens, who are exempted from almost any taxation. In Indonesia, according to article 4 of Chapter 3 of the personal income tax law in its updated version of 2008, taxable income include the following: employment income, income from the exercise of an independent profession or business, passive income (dividends, royalties, interest, insurance gains), capital gains (from the sale or transfer of a property), rents, and other income from the use of property.

When it comes to personal income tax, Indonesia has adopted a worldwide income taxation system, meaning that people considered as tax residents in Indonesia will pay tax to the Indonesian government not only on the income they earned by working in in Indonesia, but also on the income they earn while working abroad. A family is generally regarded as a single tax reporting unit with a single tax identity number in the name of the head of the family. Thus, all dependent children and spouse’s income must be reported on the same tax return in the family head’s name.

In Indonesia, the majority of personal income tax is paid through statutory employer withholdings on earned income. However, for any other income that a taxpayer in Indonesia earns on a regular basis, the taxpayer must make monthly provisional tax payments to the tax department based on the income earned in the previous year.

A taxpayer in Indonesia must be a resident. A taxpayer refers to an individual or business entity that is obligated to pay taxes to a federal, state, or municipal government body. For one to qualify for the status of Indonesian tax resident, such persons have to reside in Indonesia or have the intent of doing so. There are certain obligations that resident taxpayers must fulfil. Resident taxpayers must register with the Indonesian tax office and obtain a tax identity number. Such persons are taxed on a worldwide income regardless of the source. Non-resident taxpayers do not have an obligation to register for a tax identity number nor any individual filing obligation. They are taxed on Indonesian-sourced income only and the tax is paid via withholding by the Indonesian taxpayer.

If you would like to become an Indonesian resident, you can begin by first obtaining a work visa. We at Paul Hype Page & Co can be of assistance in this matter. We will help you go through all the necessary government dealings so that you will receive a work visa which will be accepted in Indonesia.

Tax Rates in Indonesia

The standard tax rates on taxable income received by Indonesian locals varies according̱ to the income earned. A taxable income up to 50 million rupiah is at a tax rate of 5%, a taxable income from 50 million to 250 million rupiah receives a tax rate of 15%, a taxable income of 250 million to 500 million rupiah has a tax rate of 25%, while a taxable income of over 500 million receives a tax rate of 30%. A single rate of 20% is imposed on gross income for non-resident Indonesian payers, except for sales of shares in Indonesian-incorporated companies and certain assets which are subject to a 5% final tax on the sales proceeds.

Due to the high tax burden in Indonesia, there is a possibility for the Indonesian government to experience a drop in government revenues and a slowing of economic production. Improper tax policies such as the applying of higher tax amid a weak economy may slow down the Indonesian economy. There are several tax problems Indonesia is currently facing such as the government’s unrealistic tax revenue targets, a prepaid tax scheme which had made foreign investors afraid to invest in Indonesia, and the ongoing tax reforms which are being conducted without proper administration and improvements. This has increased the personal income tax burden of Indonesian locals.

According to an analyst, some tax rules have become obstacles for foreign investors to enter Indonesia. Foreign companies are apprehensive about the government’s plan to increase its tax target because they feel they will be the target of higher tax collection. High tax burdens on Indonesian locals have affected them negatively, leading to increases in the level of poverty, inadequate income, low wages, chronic recession, foreclosures, evictions, homelessness, and low real tax revenues.

The high tax burden in Indonesia has been a major concern to locals. The Indonesian government can alleviate the burden placed on the program by establishing some programs such as Taxable Income Relief in which an income tax relief is available for those with a taxable income from employment, pension, trade, or business. Exemption amounts should be available for those with physical or mental disabilities. Income taxes are usually paid on a monthly basis or a weekly basis depending on the occupation of individual citizen.

Falling non-tax revenue has weighed on overall revenue growth in recent years, largely due to lower receipts from resources such as oil. Tax revenues are particularly low relative to other countries at a similar income level including Malaysia and the Philippines. Tax reform systems can be introduced, and these can promote compliance by lowering costs for taxpayers and raising the probability of detection.

Tax Laws and Crimes in Indonesia

Due to poverty and low income levels in Indonesia, most locals tend to avoid the payment of taxes. The tax amnesty and Automatic Exchange of Information were introduced to help detect non-compliance, which is critical to reinforce the success of the amnesty. The burden of paying taxes appears to be more time-consuming than in other emerging economies.

We at Paul Hype Page & Co do not want you to commit tax evasion or any other tax offenses. Therefore, we will assist you with any of your tax requirements. Our experienced and competent staff members will work with you to help you obtain the best possible tax outcome.

Around half of all tax revenue is raised from income taxes and a further 30% from value added tax. With low income and high rates of informality, the current personal income tax net includes few individuals and raises little revenue. Due to a large increase in the basic tax allowance, Indonesian workers pay a marginal rate of about 5%. Most components of tax revenue in Indonesia are lower than in other countries. Unequal treatment of different forms of income reduces the tax base and complicates the system. Indonesia has one of the lowest tax rates when compared to other neighboring countries, but the level of income for locals is low and this seemingly low tax rate is high for Indonesian locals. The Indonesian government should seek to improve the income level of Indonesian citizens to facilitate compliance in taxpaying and reduce the tax evasion rate.

The Indonesian government can help locals reduce their tax burden by spending more money on poverty alleviation and  health  measures,  liberalizing  food  importation,  tackling  labour  market  informality  by  reducing  rigidity  in  the formal sector and thereby enhance the effectiveness of the tax transfer system for poverty alleviation, streamlining social assistance, and integrating social security payments with the income tax system so as to boost funding for the most efficient measures such as conditional cash transfers.

If a legal tax collection instrument is not paid within the required time, the errant taxpayer may by law be issued a distress warrant. The taxpayer involved is required to pay the underpaid tax stated in a tax collection instrument within a month of the instrument date. Generally, late payments trigger an interest penalty at 2% per month. Under the current Tax Administration Law, taxpayers are bound to pay only the minimum amount they have agreed to in the tax audit closing conference, provided that they file an objection or, at a later stage, an appeal regarding the particular tax assessment letter.

If an underpaid tax is not paid within the stipulated time, an offending taxpayer will be issued a warning letter for seven days. A distress warrant is issued if tax is not settled within 21 days of the issuing of a warning letter. Thereafter, a confiscation order is issued if nothing is settled within 48 hours of the issuing of the distress warrant. An auction announcement is then published with respect to the confiscated assets if the underpaid tax is not settled within fourteen days of the issuing of the confiscation order. A public auction is then held if the underpaid tax is not settled within 14 days of auction announcement. In some serious cases, there could be an interest penalty totaling 48% of the underpaid tax.

Foreigners who are tax residents must be aware of the fact that failure to pay tax is illegal as stated in the article 21 (5) of the updated personal income tax law of 2008, and the punishments range from fines to imprisonment.

Indonesian tax residents should take note that there are many benefits that could be gained from paying their taxes when they are due. This helps in wealth redistribution; taxes redistribute wealth between taxpayers and individuals who receive government assistance. Some taxes only apply to certain products which have the advantage of reducing or discouraging consumption. For example, state taxes that apply to alcohol and cigarettes help to moderate their use. Local taxes also help the government to provide basic amenities for its citizens to facilitate their livelihood.

All these benefits will materialize if the Indonesian government can increase the income level of locals which will aid Indonesian locals in faithfully paying their taxes with no stress and inconvenience.