Indonesia Sings New Tune With Tax Harmonization Law

The Indonesian Government recently introduced a new tax law, namely Law No. 7 of 2021 regarding the Harmonization of Taxation ("Taxation Harmonization Law”), which entered into force on October 29, 2021.

The Taxation Harmonization Law is described as an ambitious tax overhaul. It amends numerous fundamental provisions of the previous taxation regime, including but not limited to the regime on value-added tax (\"VAT”), income tax, carbon tax, tax amnesty, and excise. The Taxation Harmonization Law marks the second use of the omnibus method in the Indonesian legal system, whereby a single piece of legislation revises multiple laws and regulations at once, following the passage of the Job Creation Law in 2020.

Please note that with the recent decision of the Constitutional Court that the Job Creation Law is conditionally unconstitutional and must be amended within two years as of the court\'s decision, it remains to be seen whether the Taxation Harmonization Law will meet the same fate.

The government expects the enactment of the Taxation Harmonization Law to boost state revenue before the country reinstates the budget deficit ceiling of 3% of GDP in 2023.

In general, the provisions of the Taxation Harmonization Law enter into force as of the date of the law\'s promulgation, i.e., October 29, 2021. However, several articles will take effect on certain designated dates (please refer to each section below for details). We look at some of the more notable provisions in the Taxation Harmonization Law:

A. Amendments to the General Taxation Law (Undang-Undang Ketentuan Umum dan Tata Cara Perpajakan)

The Taxation Harmonization Law amends several articles of Law No. 6 of 1983 regarding General Provisions and Procedures of Taxation, as amended several times, lastly by Law No. 16 of 2009 (\"General Taxation Law”). Some of the notable changes are:

• NIK as NPWP - Pursuant to Article 2 point 1 of the Taxation Harmonization Law, an individual\'s Indonesian National Identity Number (Nomor Induk Kependudukan or \"NIK‚Äù) now serves as a Tax Identification Number (Nomor Pokok Wajib Pajak or \"NPWP‚Äù). The NIK itself is the identification number contained in the Indonesian National Identity Card (Kartu Tanda Penduduk or \"KTP‚Äù). Previously, an NPWP was a separate number from the NIK. It seems that the law intends to simplify the tax administration system for individuals by using the NIK as the Tax Identification Number.

• Spouses, biological family or each person related by family as Taxpayer\'s Proxy - The Taxation Harmonization Law, under Article 2 point 9, now allows spouses, biological family or each person related by family (keluarga sedarah dan semenda) in a two straight line of lineage to act as the proxy of a taxpayer. Previously, the General Taxation Law only allowed individuals who were competent in the field of taxation to act as a proxy for a taxpayer (e.g., individuals who had obtained a tax consultant certificate from the relevant authority).

• Amended interest rate for sanctions relating to tax returns - The General Taxation Law provided a flat interest rate of 2% per month for the calculation of administrative sanctions for inaccurate corrections by taxpayers of their Annual and Periodical Tax Returns (Surat Pemberitahuan Tahunan dan Surat Pemberitahuan Masa). Now, Article 2 point 2 of the Taxation Harmonization Law amends the monthly interest rate using the following formula: 

Suku Bunga Acuan (Basic Interest Rate) +5% / 12

The General Taxation Law also previously provided a flat rate of 50% of outstanding tax as an administrative sanction for taxpayers who disclosed an inaccurate tax return in the middle of a Directorate General of Taxation examination. Article 2 point 2 of the Taxation Harmonization Law amends that flat rate using the following formula, which applies monthly: 

Suku Bunga Acuan (Basic Interest Rate) +10% / 12

• Reduction of Fines related to Tax Objections - The Taxation Harmonization Law amends the provision of the General Taxation Law which previously imposed a fine of 50% of the payable tax on a taxpayer whose tax objection was dismissed or only partially granted. Article 2 point 6 of the Taxation Harmonization Law reduces that fine to 30% of payable tax. Note that if the taxpayer or Directorate General of Taxation appeal the tax objection decision, this 30% fine will not be imposed until the appeals process is finished.

• Reduction of Fines related to Tax Appeal - The Taxation Harmonization Law amends the provision of the General Taxation Law which previously imposed a fine of 100% of payable tax on a taxpayer whose tax appeal was dismissed or only partially granted. Article 2 point 6 of the Taxation Harmonization Law reduces the fine to 60% of payable tax.

 B. Amendments to the Income Tax Law

 The Taxation Harmonization Law amends several articles of Law No. 7 of 1983 regarding Income Tax, as amended several times, lastly by Law No. 11 of 2020 regarding Job Creation (\"Income Tax Law‚Äù). Pursuant to Article 17 paragraph (1) of the Taxation Harmonization Law, the provisions amending the Income Tax Law shall take effect in the 2022 tax year. We look at some of the notable changes to the Income Tax Law:

• Amended annual income levels excluded from the imposition of Income Tax - The Taxation Harmonization Law, through Article 3 paragraph (3), increases the annual income levels excluded from the imposition of Income Tax as follows:

In addition to the above changes, the Taxation Harmonization Law introduces a new exception for business income received or obtained by individual Taxpayers with a certain gross turnover (Wajib Pajak orang pribadi yang memiliki peredaran bruto tertentu). Taxpayers of this type with gross turnover up to Rp500 million in a single tax year will not be subject to Income Tax.

• Amended progressive Income Tax rates - Article 3 paragraph (7) of the Taxation Harmonization Law increases the lowest annual individual income subject to Income Tax and increases the progressive tax rate for the highest income level. Previously, the Income Tax Law provided the following progressive Income Tax rates:

With the enactment of the Taxation Harmonization Law, the progressive Income Tax rates are now:

The above income levels refer to the annual income of an individual as reported in their Annual Tax Return.

With respect to legal entities and permanent business establishments (bentuk usaha tetap), the Taxation Harmonization Law imposes a flat tax rate of 22% commencing from the 2022 tax year. This rate is slightly different from the 20% rate stipulated in the previous regulation, namely Government Regulation in Lieu of Law No. 1 of 2020 regarding State Financial Policy and Financial System Stability for the Mitigation of the Coronavirus Disease 2019 (Covid-19) Pandemic and/or to Deal with Potential Threats to the National Economy and/or the Stability of the Financial System.

C. Amendments to the VAT Law 

The Taxation Harmonization Law amends several articles of Law No. 8 of 1983 regarding VAT, as amended several times, most recently by Law No. 11 of 2020 regarding Job Creation (\"VAT Law”). Pursuant to Article 17 paragraph (2) of the Taxation Harmonization Law, the provisions amending the VAT Law shall take effect April 1, 2022. Some of the notable changes are:

• Removal of certain goods and services that were previously exempted from the imposition of VAT - Pursuant to Article 4 point 1 of the Taxation Harmonization Law, certain goods and services are no longer exempted from the imposition of VAT. The goods removed from the list of VAT exempted goods are:

1. Goods which are the proceeds of mining or the proceeds of drilling that are directly taken from their source, excluding coal; and
2. Basic necessities that are needed by many people.

Services removed from the list of VAT exempted services are:

1. Medical health services (jasa pelayanan kesehatan medis);
2.  Social services (jasa pelayanan sosial);
3. Postal service with postage (jasa pengiriman surat dengan perangko);
4. Financial services;
5. Insurance services;
6. Education services;
7. Non-advertising broadcasting services;
8. Public transportation services on land and water, and domestic air transportation services that are an inseparable part of international air transportation services;
9. Manpower services;
10. Public telephone services using coins; and
11. Money delivery services by postal money order (jasa pengiriman uang dengan wesel pos).

• Amended VAT Rate - The Taxation Harmonization Law amends the VAT rate, from 10% to 11%, starting April 1, 2022. It further stipulates that the VAT rate will increase to 12% at the latest by January 1, 2025.

 D. New Law on matters relating to Tax Amnesty

Chapter V (Articles 5 -12) of the Taxation Harmonization Law regulates the Taxpayer Voluntary Disclosure Program. Through this program, the government allows taxpayers to disclose their net asset value, i.e., the value of their total assets minus liabilities, pursuant to Law No. 11 of 2016 regarding Tax Amnesty (\"Tax Amnesty Law”), for assets obtained from January 1, 1985 to December 31, 2015 and which have not been identified by the Directorate General of Taxation.

Disclosures are made by submitting an asset disclosure notification letter (surat pemberitahuan pengungkapan harta) to the Directorate General of Taxation, with a submission period from January 1, 2022 to June 30, 2022. In exchange for such disclosure, taxpayers can avoid administrative sanctions for these previously undisclosed assets, as provided in Article 18 of the Tax Amnesty Law. Instead, the disclosed assets will be deemed additional income and will be subject to final Income Tax rate, as follows:

1. 6% rate for net assets in Indonesia, provided that such assets are invested in:
   • Business lines in the natural resources management or sustainable energy sectors in Indonesia; and/or
   • The state\'s negotiable instruments (surat berharga negara).
2. 8% rate for net assets in Indonesia that are not invested in the above sectors.
3. 6% rate for net assets outside Indonesia, provided that such assets are:
   • Transferred into Indonesia; and
   • Invested in:
     1. Business lines in the natural resources management or sustainable energy sectors in Indonesia; and/or
     2. The state\'s negotiable instruments.
4. 8% rate for net assets outside Indonesia, provided that the assets are:
   • Transferred into Indonesia; but
   • Are not invested in:
     1. Business lines in the natural resources management or sustainable energy sectors in Indonesia; and/or
     2. The state\'s negotiable instruments.
5. 11% rate for net assets outside Indonesia and are not transferred into Indonesia.

The latest date for the transfer of assets into Indonesia as referred to in letters (c)(1) and (d)(1) above is September 30, 2022. And the latest date to invest the assets in certain sectors as referred to in letters (c)(2) and (d)(2) above is September 30, 2023.

E. Carbon Tax

Chapter VI of the Taxation Harmonization Law introduces a carbon tax, with the aim of reducing Indonesia\'s greenhouse gas emissions. This aim is reflected in the elucidation of Article 13 paragraph (1) of the Taxation Harmonization Law, which states that the carbon tax is being introduced to control greenhouse gas emissions in support of achieving Indonesia\'s Nationally Determined Contributions, i.e. contributions to the global response to climate change as referred to in the Paris Agreement.

Pursuant to Article 13 paragraph (1) of the Taxation Harmonization Law, the carbon tax will be imposed on carbon emissions that have an adverse impact on the environment. The subjects of the carbon tax are individuals or legal entities that purchase goods containing carbon and/or which conduct activities that produce carbon emissions.

Article 13 paragraph (8) jo. elucidation of Article 13 paragraph (3) of the Taxation Harmonization Law provide that the carbon tax rate shall be higher or equivalent to the price of carbon in the domestic market per kilogram of carbon dioxide equivalent or equivalent unit. Article 13 paragraph (9) of the Taxation Harmonization Law stipulates that if the price of carbon in the carbon market is lower than 30 rupiah per kilogram of carbon dioxide equivalent or an equivalent unit, the carbon tax rate will be set at a minimum of 30 rupiah per kilogram of carbon dioxide equivalent or equivalent unit. These two provisions will further be regulated by a Minister of Finance regulation.

Article 17 paragraph (3) of the Taxation Harmonization Law stipulates that the provisions in Article 13 on the carbon tax shall take effect on April 1, 2022. The carbon tax will initially be imposed on entities in the field of coal steam power plants (pembangkit listrik tenaga uap batubara), with a rate of 30 rupiah per kilogram of carbon dioxide equivalent or equivalent unit.

F. Amendments to Regulations on Excise

The Taxation Harmonization Law introduces minor revisions to some of the articles in Law No. 11 of 1995 regarding Excise, as amended by Law No. 39 of 2007 (\"Excise Law”). One of the notable changes to the Excise Law is a change to the procedure for adding to the list of goods subject to excise. Previously, the Excise Law merely stipulated that adding goods to the list of goods subject to excise would be done by Government Regulation. The Taxation Harmonization Law amends that so that adding or removing goods from the list of goods subject to excise shall be done by Government Regulation after proposing the change to the House of Representatives to be discussed and agreed during the drafting of the State Budget.

Additionally, the Taxation Harmonization Law now includes electronic cigarettes in tobacco products, which are subject to excise as stipulated in Article 4 paragraph (1) of the Excise Law. (14 December 2021)

For more information, please contact:

Rusmaini Lenggogeni, Partner
rusmainilenggogeni@ssek.com

Yan Diaz M. Siregar, Associate
yansiregar@ssek.com

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