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Indonesia

General Information

Country Name: Republic of Indonesia
Currency: Indonesian Rupiah (IDR)
Primary Tax Authority: Directorate General of Taxes (DGT), under the Ministry of Finance

Key Legislation

  • Constitution of Indonesia: Forms the legal basis of the tax system, with taxation guided by principles of fairness and ability to pay.
  • Income Tax Law No. 36/2008: Governs the taxation of individual and corporate income.
  • VAT Law No. 8/1983: Regulates value-added tax.
  • General Tax Provisions and Procedures Law No. 6/1983: Sets forth general tax administration rules.

Fiscal Authority Allocation

Indonesia has a centralized tax system where most taxes are collected by the central government, although certain taxes can be levied at the regional and municipal levels.

Taxes Collected by Central Authorities:

  • Corporate income tax (CIT)
  • Personal income tax (PIT)
  • Value-added tax (VAT)
  • Luxury goods sales tax (LGST)
  • Withholding taxes
  • Excise taxes

Taxes Collected by Local Authorities:

  • Land and building tax (PBB)
  • Regional vehicle tax
  • Hotel and restaurant tax

Revenue Sharing Mechanisms:

Some taxes collected by the central government are shared with regional governments, especially taxes on natural resources such as oil, gas, and mining.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 22%
  • Reduction for SMEs: Companies with an annual turnover below IDR 50 billion can benefit from a 50% reduction on taxable income up to that threshold.
  • Deductions: Business expenses such as salaries, depreciation, interest (subject to thin capitalization rules), and certain donations.
  • Loss Carryforwards/Carrybacks: Losses can be carried forward for up to 5 years. Carrybacks are not allowed.
  • Tax Incentives: Indonesia offers tax holidays for new investments in key industries, tax allowances, and a special 100% deduction for R&D expenses in certain sectors.

Value-Added Tax (VAT)

  • Standard VAT Rate: 11% (raised from 10% in 2022)
  • Scope of VAT: VAT applies to the sale of goods and services within Indonesia, imports, and certain deemed transactions.
  • Exemptions: Basic necessities, education, healthcare, financial services, and export of goods and certain services.
  • Refunds: VAT refunds are available for exports and certain business sectors.

Personal Income Tax (PIT)

  • PIT Rates: Progressive rates from 5% to 35%:
    • 5% on income up to IDR 60 million.
    • 15% on income between IDR 60 million and IDR 250 million.
    • 25% on income between IDR 250 million and IDR 500 million.
    • 30% on income between IDR 500 million and IDR 5 billion.
    • 35% on income exceeding IDR 5 billion.
  • Tax-Free Allowance: Basic individual and dependent allowances, as well as deductions for pension contributions and specific personal expenses.
  • Non-Resident Tax: Non-residents are taxed at a flat rate of 20% on Indonesian-sourced income.

Additional Mandatory Contributions

Social Security Contributions:

  • BPJS Health: Employers contribute 4% of the employee’s salary (capped at IDR 12 million per month), while employees contribute 1%.
  • BPJS Employment: Covers employment-related risks, and the contribution depends on the type of insurance, with employers typically bearing the larger portion.

National Health Contribution:

  • Integrated within the BPJS system.

Withholding Taxes

  • Dividends: 10% withholding tax for residents; 20% for non-residents, unless reduced by a tax treaty.
  • Interest: 15% withholding tax for residents; 20% for non-residents, subject to tax treaty reductions.
  • Royalties: 15% withholding tax for residents; 20% for non-residents, with possible treaty-based reductions.
  • Service Fees: Fees paid to non-residents are subject to a 20% withholding tax, which can be reduced by a tax treaty.

Transfer Pricing Rules

Indonesia follows the OECD guidelines on transfer pricing. Related-party transactions must be conducted at arm’s length, and detailed documentation is required. Penalties apply for non-compliance.

Special Tax Regimes

  • Tax Holiday: Companies investing in pioneer industries can receive a corporate income tax exemption for up to 20 years, depending on the size of the investment.
  • Tax Allowance: A tax deduction of 30% of investment value spread over 6 years, accelerated depreciation, and extended loss carryforward for companies in specific sectors.
  • Free Trade Zones (FTZ): Businesses in FTZs benefit from exemptions on VAT, import duties, and other indirect taxes.

Other Taxes

  • Land and Building Tax (PBB): Imposed on land and buildings, rates vary depending on the location and classification of the property.
  • Luxury Goods Sales Tax (LGST): Applies to luxury goods at rates ranging from 10% to 200%.
  • Excise Taxes: Applied to certain goods, such as tobacco and alcoholic beverages.
  • Stamp Duty: Imposed on certain documents, including real estate transactions and legal contracts, typically IDR 10,000 per document.

Double Taxation Agreements (DTAs)

Indonesia has an extensive network of DTAs with over 60 countries, including the US, Japan, Germany, and the UK. These agreements aim to prevent double taxation and provide relief through reduced withholding tax rates on dividends, interest, and royalties.

Compliance and Reporting

  • Corporate Tax Filing Deadline: Corporate tax returns must be filed by the end of the fourth month following the fiscal year-end.
  • VAT Filing: Monthly VAT returns are required.
  • Penalties for Late Filing: Late or incorrect filing can result in penalties, including a fine of up to 2% per month of the unpaid tax.

Recent Developments

  • VAT Rate Increase: The VAT rate was raised from 10% to 11% in April 2022, with a planned increase to 12% by 2025.
  • Tax Harmonization Law: A comprehensive tax reform package was enacted in 2021, which introduced changes in personal income tax brackets, increased VAT, and created a legal basis for carbon taxes.
  • Global Minimum Tax: Indonesia has signaled its support for the OECD’s global minimum tax initiative and is preparing for its implementation.
  • Digital Economy Taxation: In 2020, Indonesia introduced a VAT on digital goods and services provided by non-resident companies, at a rate of 11%.

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