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Indonesia to impose VAT on online products and services

New rules that will be imposing value added tax (VAT) on online products and services, which are provided by offshore companies, are being drafted by Indonesia.

According to a recent report, this is in line with the authorities’ target of getting a bigger slice of the revenue from the country’s fast growing digital market.

Indonesia is the world’s fourth most populous country with 260 million people.

In a joint study by an American multinational tech company and an investment company in Singapore, the value of the country’s internet economy reached US$ 27 billion last year.

More importantly, the study discovered that Indonesia’s internet economy is poised to grow to US$ 100 billion by 2025.

Applying VAT on digital goods and services

According to Mr John Hutagaol, who is a tax department official, while a global debate continued on how best to tax corporate income in this area, it was generally accepted that VAT, or in some cases sales tax, could be placed on digital goods and services.

He added that in order to charge VAT, Indonesia, however, would need new implementation rules to decide on the mechanism.

This is because the current rules only apply to conventional transactions, while digital ones are not limited by space and time.

Southeast Asia’s largest economy currently levies 10% VAT on all goods and services. However, any business whose turnover is below a threshold of IDR 4.8 billion (US$345,000) is exempted.

The new VAT rules would be imposed on e-commerce, content providers, start-ups and other internet-based economic activities.

The tax official added that authorities were looking to learn from the experience of Japan and Australia in applying such digital taxes.

Super ‘Tax Cut’ Incentives

In other news, the government is determined to encourage the manufacturing industry sector to be actively involved in preparing quality human resources (HR) as well as improving research and development activities (R & D).

This strategic step is to spur productivity and innovation in the industrial sector. This will boost the national economic growth and the country’s competitiveness as well.

This regulation was signed by President Joko Widodo on 25 June 2019.

This commitment was realised through the issuance of Government Regulation (PP) Number 45 of 2019, which concerns the Amendments to Government Regulation Number 94 of 2010 concerning Taxable Income Calculation and Repayment of Income Taxes in the Current Year.

Effectively encourage industries

The incentives brought about by the super tax deduction is expected to effectively encourage the industries to compete in providing education and vocational training that will improve the competitiveness of Indonesian human resources.

This will correspond to the priority programs of the Making Indonesia 4.0 road map.

In the regulation outlined in Article 29B, it was stated that domestic taxpayers who carry out work practices, apprenticeship, or learning activities in the context of HR development are to be given a reduction in gross income of a maximum of 200% of the total costs incurred.

Additionally, Article 29C outlines that domestic taxpayers that conduct R&D in Indonesia can be given a reduction in gross income of a maximum of 300% of the total costs incurred, which are charged for a certain period.

The article specifies that these R&D activities include producing inventions, producing innovations, and mastering new technologies and should be carried out in Indonesia.

The Ministry of Industry will continue to push for more and more companies to provide training and education programs to improve the quality of human resources in Indonesia.

The Minister of Industry Airlangga Hartanto explained that improving the quality of human resources is significant in preparing for the Industrial 4.0 era because a certain expertise in a particular field is required in digitalisation.


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