Ahead of Eid al-Fitr and the distribution of religious holiday allowances (tunjangan hari raya/THR), public discussions about Article 21 withholding tax have intensified. The topic gained attention following perceptions of inequality in how THR is taxed. This perception arises because civil servants, members of the armed forces, and police officers receive their THR in full. By contrast, private-sector employees typically receive THR after income tax under Article 21 has been withheld.
During a recent press conference, the Director General of Taxes, Bimo Wijayanto, clarified that both civil servants and private-sector employees remain subject to tax obligations. Civil servants are also subject to Article 21 withholding tax on THR, but the payment mechanism differs. For civil servants, members of the armed forces, and police officers, the Article 21 withholding tax is borne by the government, as the state budget funds their salaries.
Meanwhile, Minister of Finance Purbaya Yudhi Sadewa noted that private-sector employees who wish to receive their salaries in full should propose to their company’s board of management to adopt a system in which the employer bears the Article 21 withholding tax.
So, what withholding methods are actually applied in practice?
What Is Article 21 Withholding Tax?
Article 21 withholding tax is a tax imposed on income earned from employment, services, or similar activities. The obligation to withhold this tax is primarily regulated under Article 21 of the income tax law. More detailed technical provisions are set out in Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 168 of 2023 concerning the Implementation of Withholding Tax on Income from Employment, Services, or Activities of Individuals.
In principle, the tax burden ultimately falls on the individual earning the income. However, the employer acts as the withholding agent, deducting the tax from the employee’s income and remitting it to the state treasury.
After tax is withheld, employees receive a withholding tax slip that serves as supporting documentation when filing their annual tax return.
Tax Withholding Methods
In practice, companies and the government can use several methods to withhold income tax under Article 21, as outlined below:
Article 21 Withholding Tax Borne by Employees
This is the most commonly used method. Under this mechanism, the tax is withheld directly from the employee’s income, meaning that employees effectively bear the tax burden through withholding carried out by the employer.
Government-Borne Article 21 Withholding Tax
In addition to civil servants, members of the armed forces, and police officers, the government occasionally provides Article 21 withholding tax incentives for certain private-sector industries. These incentives are typically temporary and targeted. One example is PMK Number 105 of 2025, which regulates government-borne Article 21 withholding tax incentives as part of economic stimulus measures for Fiscal Year 2026.
Under this policy, the government provides Article 21 withholding tax incentives to five labor-intensive sectors that are particularly vulnerable to economic fluctuations, comprising the footwear, textile and apparel, furniture, leather and leather goods, and tourism industries.
However, eligibility for this incentive is limited. Only employees earning less than IDR 10 million per month qualify. Moreover, the incentive is only available until 2026.
Employer-Borne Article 21 Withholding Tax (Net Method)
Under the net method, the employer bears the Article 21 withholding tax, allowing employees to receive their full income without tax deductions. In this arrangement, the company pays the tax that would normally be the employee’s obligation. The tax payment is treated as a benefit-in-kind (BIK) provided to the employee.
Before the enactment of Law of the Republic of Indonesia Number 7 of 2021 concerning the Harmonization of Tax Regulations (HPP Law), BIKs were not taxable to employees and were non-deductible expenses for companies.
However, under the HPP Law, BIKs are treated as taxable income for employees and may be deductible expenses for employers.
Article 21 Withholding Tax Allowance
Another commonly used method is the tax allowance mechanism. Under this approach, the company provides employees with additional income intended to cover part of their tax liability. The allowance is treated as taxable income for employees and as a deductible expense for the company.
For example, Herman earns a monthly salary of IDR 20 million with a tax liability of IDR 1.8 million. If the company provides a tax allowance of IDR 1 million, Herman’s take-home pay becomes IDR 19.2 million after tax.
Gross-Up Method
The gross-up method is a variation of the tax allowance approach. Under this method, the company provides a tax allowance equal to the employee’s tax liability. The tax is still deducted from the employee’s income, but the company’s allowance fully offsets the amount withheld.
For instance, Musa receives a basic salary of IDR 10 million with a tax liability of IDR 500 thousand. The company provides a tax allowance of IDR 500 thousand under the gross-up method.
As a result, Musa’s gross income becomes IDR 10.5 million. After tax withholding, his take-home pay remains IDR 10 million. From the company’s perspective, the benefit of this method is that the tax allowance can be treated as a fiscally deductible expense.
These withholding methods illustrate how employee income tax can be structured in different ways, each with distinct implications for both companies and employees. The chosen method affects the tax treatment of compensation and benefits.
For this reason, understanding the available Article 21 withholding methods is essential for companies seeking to design payroll policies that remain compliant with Indonesian tax regulations.
Also Read:
https://ideatax.id/articles/updates-to-the-05-msme-final-income-tax-and-its-business-impact
https://ideatax.id/articles/decoding-the-new-delta-spt
https://ideatax.id/articles/article-26-withholding-tax-on-foreign-taxpayers
