What Is Tax in Indonesia?

What Is Tax in Indonesia?

In Indonesia, tax is a mandatory contribution paid by the public to the state, as mandated by law. It serves as a significant source of funding for public services and national development. Tax also acts as a substantial instrument to promote social justice and reduce inequality.

For both individuals and businesses, taxes are a part of everyday life. From income tax and VAT to regional taxes, such as land and building tax, all are integrated into the national tax system.

A Brief History of Indonesia’s Tax System

Indonesia’s tax system has evolved through many phases, from the Dutch colonial era to the Reform era. A major reform took place in 1983, when the country adopted a self-assessment system, giving taxpayers full responsibility for calculating, paying, and filing their taxes independently.

Today, the government continues to strengthen the tax system through digitalization, especially with the Coretax system.
Legal Framework of the Tax System

The tax system is governed by several crucial laws, including:

• The General Provisions and Procedures of Taxation Law (KUP Law)
• The Income Tax Law (PPh Law)
• The Value-Added Tax Law (VAT Law)
• The Regional Taxes and Levies Law
• Government Regulations and Minister of Finance Regulations, as implementing rules, further support these laws.
   

Types of Taxes in Indonesia

Taxes in Indonesia fall into two main categories:

1. Central taxes include income tax, value-added tax (VAT), luxury goods sales tax, and stamp duty.
2. Regional taxes include motor vehicle tax, hotel and restaurant tax, and advertising tax.

Tax Functions and Objectives in Indonesia

Taxes have several purposes:
 

• Budgetary: To fund the national and regional budgets.
• Regulatory: To steer economic growth.
• Distributive: To support income redistribution.
• Stabilizing: To maintain economic stability.
   

Are Tax Subjects and Taxpayers Different?
 

In Indonesia’s tax system, the terms ‘tax subject’ and ‘taxpayer’ are often used interchangeably and can be confusing. Though similar, they’re not the same.
Tax Subjects

Under the tax law, these are entities that may be subject to tax obligations. They include:
 

• Individuals: For example: employees, entrepreneurs, and professionals (e.g., doctors and notaries).
• Legal Entities: For example: limited liability companies, CVs, cooperatives, firms, and nonprofits.
• Undivided Inheritance: This type of inheritance is still subject to taxes until it’s fully distributed.
  Permanent Establishment (PEs): Foreign businesses operating in Indonesia without a formal legal entity.
  Taxpayers

A taxpayer is a tax subject that meets both subjective criteria (e.g., residing in Indonesia) and objective criteria (e.g., earning income or owning taxable assets), and therefore must:

• Register for and have a taxpayer identification number.
• Calculate, pay, and file taxes in line with regulations.

Examples:
 

• An employee earning above the non-taxable income threshold.
• A company generating business income.
• A freelancer or MSME owner reaching a certain revenue level.