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.