Income Tax for Micro, Small, and Medium Enterprises

The Indonesian Chamber of Commerce and Industry reported that by 2023, the number of micro, small, and medium enterprises (MSMEs) in Indonesia had reached 66 million, marking a 1.52% increase from the previous year. In 2022, the number of MSMEs in Indonesia stood at 65%. The growth in the number of MSMEs in Indonesia is illustrated in the following table:

Based on the table above, it is evident that since 2018, there has been a steady increase in the number of MSMEs in Indonesia. Despite a decline in 2020 due to the COVID-19 pandemic, the number of MSMEs has continued to grow slowly but surely.

One of the factors driving the growth of MSMEs in Indonesia is tax regulations. Government Regulation (Peraturan Pemerintah / PP) Number 23 of 2018, regarding Income Tax (Pajak Penghasilan / PPh) from Business Earned or Received by Taxpayers with Certain Gross Turnover, stipulates that income earned or received by resident taxpayers with a certain gross turnover is subject to a final PPh of 0.5% of the gross turnover.

This regulation applies to individual taxpayers and corporate taxpayers in the form of cooperatives, limited partnerships, firms, or limited liability companies whose gross turnover does not exceed Rp4,800,000,000.00 in one tax year.

Exempted Taxpayers

However, certain taxpayers are exempted from this provision, including:

• Taxpayers who opt for PPh based on the rates in Article 17, Section (1), Point a, Article 17, Section (2a), or Article 31E of the PPh Law;
• Corporate taxpayers in the form of limited partnerships or firms composed of several individual taxpayers with special expertise in providing services similar to freelance work, as referred to in Article 2, Section (4);
• Corporate taxpayers who receive PPh facilities based on Article 31A of the PPh Law or PP Number 94 of 2010 regarding Calculation of Taxable Incomes and Settlement of Income Tax in the Current Year, along with its amendments or replacements; and
• Taxpayers in the form of permanent establishments.

 

This means that taxpayers who receive PPh facilities as mentioned above cannot utilize the final PPh rate of 0.5% on certain gross turnover, even if their gross turnover in one tax year is less than IDR 4.8 billion.

Exempted Income

 

Despite the eligibility for a lower tax rate of 0.5% for incomes below IDR 4.8 billion, not all incomes qualify for this facility, this includes:

A. income earned or received by individual taxpayers from services related to freelance work, such as:

• experts engaged in freelance work, including lawyers, accountants, architects, doctors, consultants, notaries, land deed officers (Pejabat Pembuat Akta Tanah / PPAT), appraisers, and actuaries.
• musicians, presenters, singers, comedians, movie stars, soap opera stars, commercial celebrities, directors, film crews, photo models, male/female catwalk models, drama actors, and dancers;
• athletes;
• advisors, teachers, trainers, lecturers, instructors, and moderators;
• authors, researchers, and translators;
• advertising agents;
• project supervisors or managers;
• intermediaries;
• sales agents;
• insurance agents;
• distributors of multi-level marketing companies, direct sales, and other similar activities.

B. income earned or received abroad, for which tax is payable or has been paid abroad;

C. income that has been subject to final PPh under separate tax laws and regulations; and

D. income that is exempted as a tax object.

Time Period

A policy is considered successful if it improves the welfare of the targeted community. To enhance the quality of MSMEs and elevate them to middle-to-upper-class business actors, the government has set a time limit for the final PPh treatment of certain business circulations. Article 5 of PP Number 23 of 2018 stipulates that the final PPh for MSMEs is valid for a maximum of seven years for individual taxpayers, four years for corporate taxpayers in the form of cooperatives, Commanditaire Vennootschap (CV), and firms, and three years for corporate taxpayers in the form of limited liability companies.

There are two treatments for the validity period of the final PPh for MSMEs. First, for taxpayers registered after 2018, the time period mentioned above is calculated from the tax year when the taxpayer is registered. Second, for taxpayers registered before 2018, the period is calculated from the year PP Number 23 of 2018 came into effect. This means that for individual taxpayers registered before 2018, the 2024 tax year is the last tax year for them to utilize the final PPh for MSMEs.

However, the Law of the Republic of Indonesia on Harmonization of Tax Regulations (Undang-Undang Harmonisasi Peraturan Perpajakan / UU HPP) stipulates that individual taxpayers with a certain gross turnover, as referred to in Article 4, Section (2), Point e, are not subject to PPh on the portion of gross turnover up to Rp500,000,000.00 (five hundred million rupiah) in one tax year. This means that individual entrepreneurs with a gross turnover of less than IDR 500 million in a year are exempt from PPh.