Guide to Tax Obligations and Payroll Compliance in Indonesia

One crucial aspect of doing business is staying 100% compliant, regardless of where you operate. Tax obligations such as registration, payment, and reporting are mandatory compliance requirements to keep your business running smoothly.

In Indonesia, the taxation system involves various tax obligations that businesses must follow. As a foreign investor or business owner, understanding the tax system of Indonesia can be challenging, especially since regulations are prone to changes.

This article explores the key aspects of taxation in Indonesia, highlighting the most important taxes to be aware of and the sanctions and penalties for tax non-compliance.

What are Tax Obligations?

The meaning of tax obligations is a crucial aspect of doing business in Indonesia. As a business owner, you must first register as a taxpayer to obtain a Tax ID Number (NPWP). If your business generates more than IDR 4.8 billion in annual gross revenue, you must register for VAT and obtain VAT Entrepreneur Status (PKP).

This registration ensures your business is legally recognized for tax purposes and helps you comply with Indonesian tax laws. Once registered, you must file regular tax reports with the Indonesian tax authority, even if your business isn’t generating profits.

Types of Taxes Applicable to Businesses and Individuals in Indonesia

Corporate income tax (CIT), individual income tax, and value-added tax (VAT) are the most important tax obligations to which every business owner and individual should pay attention.

Tax requirements and rates may differ depending on business classification, activities, and location. For details, contact an expert in tax consultancy at InCorp Indonesia.

Corporate Income Tax

Corporate income tax obligations in Indonesia apply to local and foreign companies with a permanent establishment. For foreign businesses without a permanent establishment in Indonesia but generating income within the country, taxes are typically paid through withholding taxes deducted by the Indonesian party paying the income.

Indonesia’s general corporate income tax rate is 22% for businesses with annual revenue exceeding IDR 50 billion (around USD 3.2 million). However, for companies with smaller turnovers, Indonesia offers several incentives:

• A 0.5% tax on gross revenue benefits small businesses with annual revenue below IDR 4.8 billion (approximately USD 320,000).
• Medium-sized businesses with annual revenue between IDR 4.8 billion and IDR 50 billion are taxed 11% on their taxable profits.
• Public companies listed on the Indonesia Stock Exchange (IDX) offering more than 40% of their shares qualify for a 20% tax rate, a reduction from the standard corporate tax rate.​

Individual Income Tax

In Indonesia, individuals are considered tax residents if they meet any of the following criteria (unless a tax treaty overrides these rules):

• The individual resides in Indonesia.
• The individual stays in Indonesia for more than 183 days within 12 months.
• The individual stays in Indonesia for a fiscal year and intends to reside there.

For non-residents, Indonesia imposes a 20% withholding tax on income sourced from within the country.

Indonesia’s individual income tax system operates on a progressive tax rate scale. Currently, Indonesia’s tax brackets are simpler and consist of five main categories:

In addition to this, withholding tax is applied to various forms of income, including:

• Interest, dividends, and royalties: 15%
• Services: 2%
• Land and building rental (final tax): 10%

For non-residents, the normal withholding tax rate is 20%, although it may be reduced under a tax treaty or exempt if the services qualify as business profits.

The government has also recently raised the annual non-taxable income threshold to IDR 54 million (approximately USD 4,090) to increase people’s purchasing power and boost consumption.

Value-Added Tax

Value-Added Tax (VAT) in Indonesia applies to various taxable goods and services transactions, including:

• Delivery of taxable goods by an enterprise;
• Importation of taxable goods;
• Provision of taxable services by an enterprise;
• Use or consumption of taxable intangible goods or services originating from abroad;
• A registered enterprise exports taxable goods (tangible or intangible) and certain taxable services.

The VAT rate increased to 11% in April 2022, up from the previous 10%. Pending government assessment, an additional increase to 12% is anticipated shortly.

The VAT on exported goods and certain services remains at 0%, but specific limitations apply, particularly for certain exported services.

Sanctions and Penalties for Tax Obligations in Indonesia

Indonesia imposes various penalties and sanctions for non-compliance with tax obligations, distinguishing between non-severe and severe violations. Here’s a breakdown:

• Late Tax Payments: A company will incur a monthly surcharge of 2% on the total tax liability for late payments, which can apply for up to 24 months​.
• Failure to Report Taxes: Penalties for failure to report can range from IDR 100,000 to IDR 1,000,000, depending on the tax type. This penalty amount has been consistent in recent updates​.
• VAT Invoice Non-Compliance: A 2% surcharge instead of the previously noted 1%​applies to VAT-related issues, such as delayed or incomplete invoices.
• Severe Violations: Serious infractions, such as fraudulent tax filings, incorrect reporting, or embezzlement, carry penalties of up to 200-600% of the unpaid tax amount or prison sentences from 3 to 12 months for certain types of fraud. Further, tax crimes are subject to criminal liability, even if the business is in bankruptcy or liquidation.​

Payroll Compliance in Indonesia

In Indonesia, the company must withhold the employees’ income taxes, regardless of their citizenship. At the end of the year, the employer in Indonesia will provide employees with their annual tax returns.

Then, the company and the employees must submit their annual tax returns to the tax authority by 31 March of the following year.

Basic Tax Allowance

Each taxpayer is entitled to a basic tax allowance, making income below this threshold tax-exempt. If income surpasses the allowance, taxes apply progressively, meaning higher incomes incur higher rates.

National Taxpayer Identity Card (NPWP)

All tax residents, including foreign nationals, must register for the National Taxpayer Identity Card (NPWP). Those without the NPWP are subject to an additional 20% charge on their income tax withholding.

Payroll Components and Additional Considerations

• Minimum Salary: Regional minimum wage varies across Indonesia.
• Work Hours: Standard work hours are 40 per week, typically Monday to Friday.
• Overtime: Employees can work up to 3 hours daily, with an overtime rate of 1/173 of their monthly hourly salary.
• Holiday Allowance (THR): All employees receive a religious holiday allowance before Eid al-Fitr or Christmas, provided as additional income beyond regular wage.
• Mandatory Insurance (BPJS): All employees, both local and foreign, who have resided in Indonesia for over six months must enroll in BPJS programs, which cover healthcare and social security.

Simplify Your Tax Obligations with InCorp

Managing taxes and payroll in Indonesia can be complex and time-consuming. Instead of handling it alone, allow InCorp’s team of experts to simplify the process for you.

Here’s how we can help:

• Payroll Outsourcing: Efficiently manage payroll tasks, ensuring timely and accurate payments.
• Tax Reporting: Stay compliant with all tax regulations and avoid costly penalties.

Get the peace of mind you need to focus on expanding your business. Fill out the form below to schedule a free consultation with our specialists.