In July 2018, Indonesia lowered the income tax rate for small and medium-sized businesses (SMEs). The Ministry of Finance issued a regulation which also sets the application deadlines for the reduced income tax rate in Indonesia.
In this article, we will answer the most frequently asked questions about the changes affecting the income tax rate of small and medium-sized enterprises (SMEs) in Indonesia.
Who is eligible for the reduced income tax in Indonesia?
The government regulation Peraturan Pemerintah 23/2018 (PP-23), effective from July 2018, reduced the income tax rate in Indonesia to 0.5% from the previous 1%.
According to the PP-23, individual taxpayers, as well as companies with gross income below IDR 4.8 billion a year (~USD 320,000), can enjoy the reduced income tax rate in Indonesia.
Individual taxpayers can use the reduced income tax rate for seven years. Companies, on the other hand, can enjoy its benefits initially for three years.
Keep in mind that if your company’s annual income exceeds IDR 4.8 billion during this period, you need to pay the income tax according to the general tax rates (12.5-25% of the profit). Moreover, you also cannot proceed with the reduced tax rate.
Even if your annual income does not exceed IDR 4.8 billion, the new government regulation PP-23 allows you to choose between two income tax rates:
- Income tax rate (0.5% of the revenue/gross income)
- General tax rate (12.5-25% of the profit)
Whichever option you prefer, make sure to have your bookkeeping and financial reports in order. Emerhub’s experienced accountants can assist you with that. Reach out to them via [email protected] (Jakarta) or [email protected] (Bali).
When to apply for the reduced income tax rate in Indonesia?
The Ministry of Finance (MoF) stipulates the deadlines for applying for the reduced income tax rate, also known as the final income tax, in its recently released regulation Peraturan Menteri Keuangan 99/2018 (PMK-99).
To apply, you need to send a notification letter to the same tax office in which you completed your company’s tax registration. The tax office will then forward the notification to the Director General of Tax (DGT).
The deadlines for submitting the notification depend on the time of your company’s tax registration and are as follows:
|
Time of your company’s tax registration |
Deadline for submitting the notification letter |
|
Before 2018 |
31 December 2018 |
|
1 January- 30 June 2018 |
31 December 2018 |
|
1 July-31 December 2018 |
No need to send the notification to use the 0,5% final income tax |
|
From 1 January 2019 |
During Tax ID registration |
If you registered your tax ID before 2018 and you are already using the 1% income tax, you need to send a notification letter before 31 December 2018 to be eligible for the 0.5% final income tax. However, if the tax office does not approve your application, you need to pay the general tax rate.
If your company’s tax registration was between 1 January-30 June 2018, you need to send the notification letter before 31 December 2018 as well.
However, if you complete your tax registration between 1 July 2018- 31 December 2018, you don’t need to submit a separate notification letter to be eligible for 0.5% of the final income tax. Although, some tax offices need to confirm with their Account Representative.
Companies that complete their tax registration starting from 1 January 2019 must send the notification letter to the tax office during the tax ID registration.
Choosing the general tax rate
Keep in mind that you also need to send a notification letter to the tax office if you prefer the standard tax rate instead of the final income tax. The deadlines are the same as in the table above.
How to apply for the reduced income tax rate in Indonesia?
To apply for the 0.5% income tax, you need to obtain a statement letter first. You can do that by sending an application to the tax office in which you received your tax ID.
Take note that when applying for the tax reduction, you also need to fulfill the following requirements:
- The Director of the company has to sign the application letter
- You need to submit the latest annual tax report (except newly-registered companies or companies that are not obliged to file a yearly tax report)
The tax office will then issue a statement letter or a rejection letter within three working days after the complete application is received. If the tax office rejects your claim, you can re-apply for a new statement letter.
The validity period of a statement letter starts from the day of issuance up to the limit of the final income tax period or until you decide to use the general tax rate (12.5-25%).
Withholding tax
As you will pay the final income tax through self-assessment or tax withholding, it is essential to follow regulations properly.
Take note that if you use the 0.5% final income tax under PP-23 and are transacting with a tax withholder, 0.5% of final income tax should be withheld instead of the standard withholding tax rate of 2%.
However, you must first provide a statement letter from the DGT to withhold 0.5% of income tax instead of 2%.
When to pay income taxes in Indonesia?
The monthly payment of the final income tax is the 15th day of the month. However, the deadline for paying the withholding and employee taxes is the 10th day of each month.
Have a look at our previous article on tax planning in Indonesia to learn more about the taxes companies need to pay in Indonesia.
Tax reporting in Indonesia
Not sure whether your tax reporting is keeping up with the latest regulations in Indonesia? Emerhub’s qualified accountants can help you verify it or assist you in getting it in order. Reach out to them by filling in the form below.
