This is an updated and expanded version of an earlier post.
The amendment of the Income Tax Law has been in the pipeline for some time and as is the Indonesian way of legislation, important bills tend to have myriad of issues identified within the proposed provisions. The list of problems identified with the amendments runs to some 770 issues in this case. This list of problems ensures that debate is long and passage time even longer. It also meant that Commission XI of the House of Representatives (DPR) and the Work Committee set up to resolve these issues had plenty of work to do.
This work was expected to be resolved by the end of 2008 and the amended legislation will be passed by the DPR. However, the DPR has seemed to have made light work of the problems and the Bill was passed by the DPR on 2 September 2008. The general consensus was proved right in that the amendments were technical in nature and did not trigger a significant ideological or policy debate.
Individual Tax Rates
The amendments ensure that there is a reduction in the number of taxation levels from the current five to just four. The maximum rate of taxation will fall from 35% to 30%. Salaries up to IDR 50 million will be taxed at 5%, salaries between IDR 50 and IDR 250 million will be taxed at 15%, salaries from IDR 250 to IDR 500 million will be taxed at 25%, and salaries above IDR 500 million will be taxed at 30%.
The amendments also see the removal of the Fiscal Tax that is paid by residents leaving the country. This will be phased in commencing in 2009 and be in full operation from 2011. The idea of phasing out the fiscal tax is based on the assumption that people will obtain a tax file number in order to be able to take advantage of the no fiscal clause. Therefore, those who already have a tax file number appear to be the most likely to see an immediate benefit from this initiative.
Other amendments include incentives for those making contributions to religious activities; incentives for listed companies; incentives for micro, small, and medium enterprises; the taxing of revenue not currently classed as taxable objects (such as the Bank Indonesia surplus), and incentives designed to make Indonesia an attractive destination for both domestic and foreign capital investments.
The amendments are expected to ensure that Indonesia has in place a modern, effective, and efficient tax code that will contribute significantly to national development.
Earlier Versions of the Bill
The only difference of note between the earlier version of the Bill and the one that was passed by the DPR is that the intended insertion of Article 2A did not survive the discussion and debate process and consequently was not inserted into the final version of the Bill.
However, for the purposes of review, the new law clarifies or simplifies the following income tax matters:
1. subjects and objects of tax;
2. tax object exceptions;
3. claimable fees;
4. spouses that choose to have a tax payer number of their own;
5. net income calculation norms;
6. non-taxable income thresholds;
8. tax avoidance prevention;
10. foreign tax credits;
11. taxation provisions in the mining and Syariah sectors; and
12. tax facilities for micro, small, and medium scale enterprises.
Corporate Tax Rates
Aside from the benefits that individual tax payers get to enjoy from the amendments, it is worth noting that the government has not ignored corporate tax payers. The current corporate tax rates of 10%, 15%, and 30% will disappear in 2009 in favour of a single corporate tax rate of 28%. In 2010, this corporate tax rate will fall to a flat 25%.
For those companies wanting to go public the new tax provisions provide for a 5% discount on the usual applicable tariff where at least 40% of the shares being offered are offered to the public and subsequently purchased by public buyers.
The government realizes that micro, small, and medium scale enterprises play a significant role in employment and development in the regional areas of Indonesia. Therefore, the recently passed bill recognizes this contribution by providing a discount of up to 50% on the applicable tax rate up to IDR 4.8 billion for gross distribution.
As was noted earlier the Government has moved towards phasing out the fiscal tax currently payable by all Indonesians and residents of Indonesia. However, other objects that are no longer going to be subject to tax include student scholarships, financial assistance, educational funds, and research and development. It must be noted that the exemption on research and development taxation is dependent on the excess funding being ploughed back into the research and development program within four years.
It is clear that the Government intends to improve the legal certainty of tax collection in Indonesia. However, this requires that the government tighten enforcement and tighter enforcement requires provisions that are not only clear but easy to comply with.
Indonesian tax payers will be bearing a lighter tax burden in the future and the Department of Finance is of the belief that the lighter the burden the more likely income earners without a tax number are going to register and pay tax. This will increase tax revenue and decrease the numbers of Indonesians not paying their share.
The key will be enforcement. The provisions appear reasonably solid. The only thing standing in the way of the Directorate General of Tax collecting all payable tax is no longer the legislation but the methods used to enforce the provisions.