Indonesia Tax System

Indonesia Tax System: How It Works

Delving into the intricacies of the tax system in Indonesia is like unlocking the financial heartbeat of this archipelagic nation. Looking for insights of tax system in Indonesia? Don’t Worry! We’ve got you covered!

This guide is your compass through the complexities of Indonesian taxation, shedding light on the key components, regulations, and nuances that shape the country’s fiscal landscape. Whether you’re a business owner, an expatriate, or a curious traveler, understanding Indonesia’s tax system is essential for navigating financial waters with confidence.

Let’s dive in!

Eligibility To Pay Income Taxes

Indonesia Tax System 1

An individual is deemed a domestic tax subject under Indonesia’s former income tax law if they were present in the country for more than 183 days in 12 months, or if they intend to stay in Indonesia.

The government has offered additional clarification on the definitions of ‘ residing in Indonesia’ and ‘intention to stay in Indonesia’ through PMK 18/2021.

An individual who resides in Indonesia is defined as:

  • Lives in an Indonesian residence that is available and accessible at all times, which they own or rent, and is not a transit stop
  • Have vital interests in Indonesia
  • Reside in Indonesia regularly

An ‘intention to stay in Indonesia’ must be supported by the following documents:

  • A permanent stay permission
  • A limited-stay visa
  • A limited stay permits
  • Other documentation supporting their stay in Indonesia for more than 183 days

Income Tax On Corporations

If a company’s domicile is in Indonesia, it is subject to the tax responsibilities imposed by the Indonesian government. Similarly, a foreign corporation that has a (permanent) establishment in Indonesia and conducts business through this local organization is subject to Indonesian taxation.

   If a foreign company does not have a permanent establishment in Indonesia but generates money from business activities in Indonesia, it must fulfill its tax liabilities by withholding tax from the Indonesian party paying the income.

The corporate income tax rate in Indonesia is generally 25%. However, there are a few exceptions:

  • corporations mentioned on the Indonesia Stock Exchange (IDX) that provide at least 40% of their entire share capital to the public receive a 5% tax break (therefore a 20% tax rate applies to these public corporations).
  • Small and medium-sized businesses having an annual turnover of less than IDR 50 billion (approx. USD 3.8 million) qualify for a 50% tax break (applied proportionally on taxable income of the amount of gross turnover up to IDR 4.8 billion). 
Corporate Income TaxTax Rate
 general rate    25%
 Public company with >40% of its shares traded on the IDX    20%
 Companies with a gross turnover of less than IDR 50 billion   12.5%
• Companies with a gross turnover of less than IDR 4.8 billion     1%

Personal Income Tax

Indonesia Tax System 2

Individual income is subject to progressive income tax rates ranging from 5% to 35%. Personal income tax (PIT) in Indonesia is calculated by a self-assessment method, which expatriates should be aware of.

The country has implemented a worldwide income taxation system, which means that persons considered to be Indonesian tax residents must pay tax to the government on income received in Indonesia as well as money earned overseas unless a double tax treaty exists.

If an individual meets any of the following criteria, he or she is considered a tax resident in Indonesia (unless a tax treaty overrides these rules):

The individual resides in Indonesia; the individual is in Indonesia for more than 183 days in 12 months; the individual is in Indonesia during a fiscal year and plans to reside in Indonesia.

Meanwhile, non-resident people are subject to a 20% withholding tax on income earned in Indonesia.

Individual taxpayers in Indonesia must pay income tax on nearly all of their earnings. Taxable annual income is taxed at the following progressive rates:

Individual Income TaxRate of Tax
 Up to IDR 50 million     5%
 More than IDR 50 million to IDR 250 million    15%
 More than IDR 250 million to IDR 500 million    25%
 More than IDR 500 million    30%

Employers collect a major portion of individual income tax through withholding. Employers deduct income tax from employees’ salaries and other payments monthly. 

The tax rates shown above apply if the employee is a resident taxpayer (one who resides in Indonesia).

If the person is a non-resident taxpayer, the withholding tax is 20% of the gross amount (the amount varies based on the tax treaty).

Withholding Tax (for payments to residents)Tax Rate
 For royalties, dividends & interests    15%
 For services     2%
 for land and building rental (final tax)    10%
 These withholding taxes are considered corporate tax prepayments
• Withholding tax calculated on sales/revenue is considered a final tax

Withholding Tax (for payments to non-residents)
Tax Rate
• generate rate (can be reduced by using tax treaty provisions, or exempt
services that qualify as business profits)
20%

In 2016, the annual non-taxable income was set at IDR 36 million (about USD 2,727). 

However, Finance Minister Bambang Brodjonegoro stated in April 2016 that the government intends to increase non-taxable income by 50% to IDR 54 million (approx. USD 4,090) to enhance people’s purchasing power and boost household consumption.

VAT (Value Added Tax)

Indonesia Tax System 3

Value Added Tax (VAT) is levied in Indonesia on the transfer of taxable goods or the provision of taxable services. The following are examples of taxable events/services:

  • Deliveries of taxable commodities by a business
  • Imports of taxable merchandise
  • Deliveries of taxable services by a business
  • Use or consumption of taxable intangible goods and services from another country
  • A taxable enterprise exports taxable goods (tangible and intangible) or services.
Value-Added Tax (VAT)Tax Rate
 normal rate    10%

The VAT rate in Indonesia is generally 10%. However, the specific quantity may be increased or decreased to 15% or 5% depending on government rules.

 VAT is fixed at 0% on the export of taxable tangible and intangible items, as well as services. There are some limitations to zero-rated VAT on service exports.

Tax On Luxury Goods

In addition to VAT, Indonesia has a luxury goods sales tax (LGST), which was implemented during the Suharto regime and is intended to promote a more equitable society.

 This tax means that some manufactured taxable commodities, such as luxury vehicles, flats, and houses, are subject to an additional tax. LGST rates are now fixed between 10 and 125 percent (the law allows for a maximum LGST rate of 200 percent).

Excise And Customs

Although Indonesian legislation allows for import tariffs ranging from 0% to around 150 percent (of the customs value of the imported commodity), the highest amount currently in place is 40%

As the economy has become more globalized, Indonesia has negotiated many free-trade agreements, thereby eliminating or drastically cutting import duty rates.

 However, for protectionist policies, the government continues to levy hefty charges on select goods. Other anti-dumping import duty rates apply to certain items from specific nations.

Foreigners’ Territorial Taxation

Indonesia Tax System 4

Foreigners who become domestic tax subjects will only be taxed on income earned in Indonesia. This is only applicable if they meet the expertise standards outlined in PMK-18 Appendix II.

Their knowledge, however, must be backed up by:

  • A certificate from a government-approved institution, or a minimum of five years of job experience in the fields of science, technology, and math
  • An obligation to pass knowledge to an Indonesian citizen.

For four years of residency, the territorial tax treatment is possible. If the foreign individual leaves and returns to Indonesia within four years, territorial taxes will begin from the time they become a domestic tax subject.

Foreigners seeking territorial tax treatment must apply to the Directorate General of Taxes (DGS). Those who were previously subject to domestic taxation before the issuance of PMK-18/2021 may also apply to the DGS for this tax treatment. 

Because of their specific legal status, certain international expats are not considered Indonesian tax residents and are excused from paying PIT, even if they stay in Indonesia for more than 183 days per year or dwell and intend to stay in Indonesia.

These exemptions apply to:

  • Foreign diplomatic and consular staff
  • military and civilian personnel of foreign armed forces
  • representatives of international organizations designated by the Minister of Finance.
Annual income                            Rate (%)
Up to 60 million rupiah (US$4,220)                                  5
More than 60 million rupiah (US$4,220) to 250 million rupiah (US$17,500                                15
More than 250 million (US$17,500) to 500 million rupiah (US$35,170)                                25
More than 500 million rupiah (US$35,170) to 5 billion rupiah (US$351, 000)                                30
More than 5 billion rupiah (US$351, 000)                                  35

Tax Breaks And Relief

When calculating an individual’s annual taxable income, various elements can be inferred from gross income.

It is important to note that a family is treated as a single tax reporting unit, with a single tax identity number (NPWP) in the name of the family’s head. On their tax return, the head of the household must report the income of their dependent spouse and children.

For resident taxpayers, the following personal deductions are allowed.

Basic of deductionDeductible amount per year
Individual taxpayer54 million rupiah (US$3,739)
SpouseAdditional 4.5 million rupiah (US$311)
Each dependent (max 3)Additional 4.5 million rupiah (US$311)

Withholding Tax

Indonesia Tax System 5

In Indonesia, withholding tax applies to both resident and non-resident companies. Dividends are taxed at 15% for residents and 20% for non-residents (unless they have an applicable tax treaty). 

The rate of withholding tax on interest and royalties is also established at 15% for residents and 20% for non-residents.

Nature of incomeTax rate (%)
ResidentsNon-residents
Dividends1520
Interest1520
Royalties1520

Tax Return In Indonesia

An individual must register as a taxpayer in order to get a tax identification number (NPWP) in order to file a tax return in Indonesia. If they are tax residents, expatriates must get an NPWP.

While companies are responsible for deducting taxes from their employee’s salaries, the individual employee must register as a taxpayer and file their tax returns.

Conclusion

As we conclude our exploration of Indonesia’s tax system, you’re now equipped with insights into the fiscal mechanisms that drive the nation’s economic heartbeat. Navigating Indonesian taxes can be intricate, but with the right knowledge, compliance becomes a pathway to financial success.

Here’s to a future where your understanding of Indonesia’s tax landscape empowers your financial decisions, ensuring a prosperous journey in this diverse and dynamic Southeast Asian gem.

Tax Clarity!

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