Indonesia government has lowered the income tax rate for small and medium-sized businesses (SMEs) in July 2018, making it easier to open up business in Indonesia. According to Government Regulation (PP-23) effective in July 2018, the reduced income tax rate in Indonesia is 0.5% from previous 1%.
In this article, we provide you all the information you need to know about reduced income tax for small and medium-sized enterprises (SMEs) and how to apply for it.
Who is eligible to apply reduced income tax?
According to the PP-23, individual taxpayers, as well as companies with gross income below IDR 4.8 billion per year (~ USD 340,000), can apply for reduced income tax rate in Indonesia. Individual taxpayers can enjoy the reduced tax rate for seven years, whereas companies can enjoy for three years.
If your company’s annual income exceeds IDR 4.8 billion during this period, you need to pay the income tax according to the general tax rates (12.5-25% of the profit). Moreover, you also cannot proceed with the reduced tax rate.
Even if your annual income does not exceed IDR 4.8 billion, the new government regulation PP-23 allows you to choose between two income tax rates:
- Income tax rate (0.5% of the revenue/gross income)
- General tax rate (12.5-25% of the profit)
What if your company gross income greater than IDR 4.8 billion per year?
The answer for this question is, you can set up several legal entities in Indonesia to keep the income per company below the required IDR 4.8 billion. If you have two legal entities in Indonesia, you can have a total income of IDR 9.6 billion. This method would allow you to still pay the reduced income tax rate in Indonesia, as long as you divide the income between the companies.
Please note that to use this method, you will have to pay attention to the status of each entity. If one entity is registered as a branch office and the other as the headquarter, the income should be combined, therefore you cannot apply for reduced income tax. If the companies are independent (not registered as part of the branch of one another), then these incomes can be separated. This also means that reducing tax pay is possible.
When to apply for reduced income tax?
Companies that complete their tax registration starting from 1 January 2019 must send the notification letter to the tax office during the tax ID registration. Keep in mind that you also need to send a notification letter to the tax office if you prefer the standard tax rate instead of the final income tax. The deadlines are the same as in the table above.
How to apply for reduced income tax?
To apply for the 0.5% income tax, you need to obtain a statement letter first. You can do that by sending an application to the tax office in which you received your tax ID. Below are the requirements to apply for reduced income tax:
- The Director of the company has to sign the application letter
- You need to submit the latest annual tax report (except newly-registered companies or companies that are not obliged to file a yearly tax report)
The tax office will then issue a statement letter or a rejection letter within three working days after the complete application is received. If the tax office rejects your claim, you can re-apply for a new statement letter. The validity period of a statement letter starts from the day of issuance up to the limit of the final income tax period or until you decide to use the general tax rate (12.5-25%).
When to pay income tax?
The monthly payment of the final income tax is the 15th day of the month. However, the deadline for paying the withholding and employee taxes is the 10th day of each month.
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