personal income tax in indonesia

INTRODUCTION It is no secret that tax system has an enormous impact on the development of a country Obviously, the major source of state budget is derived from tax compliance Therefore, if government impose a proper tax administration based on different aspects such as economics, culture and politics situation, the overall condition of that country will be improved However, it is a fact that not every tax policy put into force can get its expected results in real life As a result of our thorough consideration, we find out that personal income tax (PIT) plays an important role as it relates to every individual within the nation Among countries in the world, we would like to research about Indonesia, one of South East Asia countries As we have mentioned above, each tax policy probably has both merits and demerits Therefore, in this assignment we would like to point out these characteristics and then make a comparison with tax administration in Vietnam Based on these analysis, some recommendations will be elaborated in order to boost tax policy in Vietnam Our group assignment on the topic “Personal Income Tax (PIT) in Indonesia” will be in parts: I Personal Income Tax (PIT) in Indonesia II Comparison PIT between Vietnam and Indonesia III Pros and Cons of PIT in Indonesia IV Recommendations for a more effective taxation (especially PIT) system in Vietnam I PERSONAL INCOME TAX IN INDONESIA Tax payers and taxable base a Tax resident: An individual is regarded as a tax resident if he/she fulfills any of the following conditions: - He/she resides in Indonesia; - He/she is present in Indonesia for more than 183 days in any 12-month period; - He/she is present in Indonesia during a fiscal year and intends to reside in Indonesia Taxable base: Indonesian-resident taxpayers are subject to tax on worldwide income b Non - resident: - Not satisfy above condition - Under a tax regulation, which was issued on 12 January 2009, an Indonesian national who works overseas for more than 183 days within any 12-month period is considered a nonresident and that is subject to tax overseas Taxable base: Nonresidents are subject to tax on Indonesian-source income only Note: - Diplomats and representatives of certain international organizations are excluded from Indonesian tax if the countries they represent provide reciprocal exemptions Taxable incomes - Employment income - Self-employment and business income - Directors’ fees - Investment income a Employment income - Taxable income of an employee includes wages, salaries, commissions, bonuses, pensions, directors’ fees and other compensation for work performed However, this treatment does not apply to employees of the following: • Oil and gas companies under contracts entered into under pre1984 law • Representative offices, which are not subject to Indonesian corporate income tax • Various international organizations and embassies • Employers who are taxed based on a “deemed profit” basis • Employers who are subject to final tax - Fringe benefits provided to employees, received in the form of cash allowances are taxable - Termination pay and lump-sum pension payments are subject to final withholding tax b Self-employment and business income - Members of partnerships, firms and associations, as well as other individuals, may be subject to tax on self-employment or business income - Taxable income includes trading profits, profits from the sale of property connected with a business, annuities and waivers of debts (except waivers of debts for a small entrepreneur of up to IDR5 million) - Self-employment and business income is combined with other income and is taxable c Directors’ fees - Directors’ fees are included in taxable employment income d Investment income - Dividends paid to individuals, rents, royalties and certain interest are subject to withholding tax at various rates These types of investment income generally are combined with other income and is taxable However, the 20% withholding tax on interest derived from the following investments is a final withholding tax: • Time deposits, including time deposits placed abroad through a bank established in Indonesia or through a branch of a foreign bank • Certificates of deposit • Savings accounts - Income from the rental of land and buildings is subject to a final withholding tax at a rate of 10% - Dividends paid to resident individuals are subject to a final withholding tax at a rate of 10% Non-taxable incomes - Compensation in kind for work or services is not taxable income for the employee and is not a deductible expense for the employer - Fringe benefits provided to employees, including employer-provided housing and automobiles, are not included in an employee’s taxable income but they are allowable deductions for the employer if the employee works in a remote area Allowances Type of allowance Amount of allowance in IDR Personal allowance 54,000,000 Married persons’ additional allowance 4,500,000 Wife’s additional allowance if receiving income not related to husband’s or other family member’s income 54,000,000 Additional allowance for each dependent family member in direct bloodline and for adopted children, up to a maximum of three individuals 4,500,000 Table 1: Allowances in Indonesia Tax rates a Resident Taxpayer The standard tax rates on taxable income received by most of resident taxpayers are as follows: ● Normal tax rates Taxable Income Rate Tax Rp Up to Rp 50,000,000 5% 2500000 Over Rp 50,000,000 but not exceeding Rp 250,000,000 15% 30000000 Over Rp 250,000,000 but not exceeding Rp 500,000,000 25% 62500000 30% Over Rp 500,000,000 30% of the relevant amount Table 2: Normal tax rate in Indonesia ● Concessional tax rates The final tax rates for severance payments (if paid within two years) are as follows: Gross Income Up to Rp 50,000,000 Above Rp 50,000,000 up to Rp 100,000,000 Rate Tax Rp 5% 2,500,000 Above Rp 100,000,000 up to Rp 500,000,000 15% 60,000,000 Above Rp 500,000,000 25% 25% of the relevant amount Table 3: Concessional tax rates- final tax rates for severance payments The final tax rates for lump-sum pension payments from a government-approved pension fund, old-age security saving payments from BPJS Ketenagakerjaan (workers’ social security program) if paid within two years are as follows: Gross Income Rate Tax Rp Up to Rp 50,000,000 0 Above Rp 50,000,000 5% 5% of the relevant amount Table 4: Concessional tax rates- final tax rates for lump-sum pension payments Payments for year onwards, the usual normal tax rates (refer to table 1) will be applied ● Main Personal Relief Annual non-taxable income (Penghasilan Tidak Kena Pajak/ PTKP) for resident individuals is as follows: Rp Taxpayer 54,000,000 Spouse 4,500,000 Each dependant (max of 3) 4,500,000 Occupational expenses (5% of gross income, max Rp 500,000/month) 6,000,000 Employee contribution to BPJS Ketenagakerjaan for old age security savings (2% of gross income) Full amount Pension maintenance expenses (5% of gross income, max Rp 200,000/month) 2,400,000 Table 5: Main personal relief b Non-resident Taxpayer A single rate of 20% is imposed on gross income; however, this rate may vary depending on the circumstances and the applicable tax treaty provisions Specific tax rates apply for income that is subject to final tax (Article 26 income tax, subject to a relevant tax treaty provisions) 10 Tax withholding A large part of individual income tax is collected through withholding by employers Employers withhold income tax on a monthly basis from the salaries and other compensation paid to the employees In case the employee is a resident taxpayer (living in Indonesia), the above-mentioned tax rates apply If the individual is a non-resident taxpayer, the withholding tax is 20 percent of the gross amount (in case of a tax treaty the amount may vary) Withholding tax (for payments to residents) Tax rate For interest, dividends and royalties 15% For services 2% For land and building rental (final tax) 10% These withholding taxes are considered corporate tax prepayments Withholding tax calculated on sales/revenue is considered a final tax Table 6: Withholding tax (for payments to residents) Tax rate Withholding tax (for payments to non-residents) 20% Normal rate (can be reduced by using tax treaty provisions, or exempt services that qualify as business profits) Table 7: Withholding tax (for payments to non-residents) 11 II COMPARISON PERSONAL INCOME TAX (PIT) BETWEEN VIETNAM AND INDONESIA Tax payers and taxable base - Tax payers: Both countries categorize tax payers into groups: resident and non-resident, with similar residency status characteristics applied for each group (described above) - Taxable base: Both countries tax residents on their worldwide income and non-residents on income sourced within their perspective countries Tax rates a Residents - In general, all ASEAN countries have a progressive tax structure, with most of the ASEAN countries imposing a zero percent minimum PIT rate, exempting certain levels of income Vietnam and Indonesia, however, are an exception, imposing a minimum rate of percent on PIT - Vietnam imposes the highest top marginal rate of 35% in ASEAN Meanwhile, the maximum rate in Indonesia is 30% b Non-residents - Vietnam imposes different tax rates depending on the types of nonresident’s business activity - Meanwhile, Indonesia applies the same rate for all business activities of non-residents Vietnam - Business in goods and production: 1% Indonesia 20% - Services: 5% - Construction, transportation and other business activities: 2% Table 8: Tax rates for non-residents in Vietnam and Indonesia Income tax schedules - Vietnam has taxable income brackets 12 Gross Income Rate Up to 60,000,000 VND 5% 60,000,000 - 120,000,000 VND 10% 120,000,000 - 216,000,000 VND 15% 216,000,000 - 384,000,000 VND 20% 384,000,000 - 624,000,000 VND 25% 624,000,000 - 960,000,000 VND 30% Above 960,000,000 VND 35% Table 9: Normal PIT tax rates in Vietnam - Indonesia has taxable income brackets (refer to Table 2: Normal tax rates) Non-taxable employment income There are certain items of income that are not treated as part of total taxable income of individuals and therefore are not subject to income tax The table below presents the comparison of income tax exemptions between Indonesia and Vietnam 13 Indonesia Vietnam Contribution to a pension fund approved by the Subsidies for shift work and Minister of Finance and to TASPEN (Personal dangerous or harmful occupations Insurance Saving Agency), as well as old-age Subsidies for working in isolated savings or old-age allowance contributions to areas (mountainous areas and TASPEN and to the Employees’ Social Guarantee offshore islands) Program Remuneration for technical innovation and inventions recognized by the competent state authorities One-off allowance for relocation to Vietnam based on a labor contract or agreement between the employer and employee School fees paid by the employer for elementary and high school education in international schools in Vietnam for the children of expatriate employees Cost of a return air ticket to the home country of the expatriate employee for a holiday once a year Stationery, per diem, telephone and uniform allowances, within the limits provided by the prevailing regulations Table 10: Non-taxable employment income in Indonesia and Vietnam 14 Allowances a Personal and Additional Exemption (PAE) Allowances - In Vietnam, taxpayers are allowed to deduct personal and additional exemption allowances for dependent children - In Vietnam, as long as the child is not yet earning income and/or is still studying, the taxpayer can claim for additional allowance or relief - In Indonesia, an additional allowance for the wife is provided if her income is not related to her husband’s (the taxpayer) or other family members’ income - PAEs are not available to non-resident in Vietnam b Allowable deductions from taxable employment income Indonesia Vietnam Standard deduction equivalent Mandatory social, health and to 5% of gross income, up to a unemployment insurance contributions maximum of IDR million a year Certain contributions to charitable, humanitarian or study promotion funds Contributions to voluntary pension funds which are established in accordance with the Ministry of Finance's guidance, not exceeding VND million per month Table 11: Allowable deductions from taxable employment income in Indonesia and Vietnam c Allowable deductions from taxable business income Deductions from In-ASEAN countries (including Indonesia and Vietnam), aside from the PAES, resident individuals are allowed to deduct from their business income necessary and ordinary expenses incurred in the production of income and other expenses such as interest, depreciation, taxes, losses and charitable contributions, among others 15 Indonesia Ordinary expenses Vietnam connected Expenses arising from and directly with earning income, including cost related to the creation of taxable income, of materials, employee including remuneration, bad debts, insurance materials, premiums and administrative costs salaries of depreciation, employees, interest, management expenses, taxes and fees Taxes other than income tax Depreciation and amortization, in accordance with specified rates Contributions to approved pension funds Loses from the sale of property or rights used in a business Foreign-exchange losses Cost of research and development performed in Indonesia Scholarship, apprenticeship and training costs Fifty percent of the cost of automobiles provided to employees Table 12: Allowable deductions from taxable business income in Indonesia and Vietnam 16 III PROS AND CONS OF PIT IN INDONESIA Pros of PIT in Indonesia Obviously, tax administration for individuals in Indonesia brings about certain upsides to the whole society in general and its citizens in particular First, Indonesian government has invested state budget in technological platforms which facilitate the tax procedures Thus, this eases compliance costs and create more payment options for the dwellers Additionally, this policy may significantly raise awareness of its people Tax administration is also raising the probability of detection of evasion by using third-party data such as bank accounts and social media presence for accurate information Unlike Vietnam, Indonesia imposes a strict legislation on those who not fully complete tax responsibility Late payment will be subject to percent interest penalty per month while late filling will be sanctioned with a penalty of IDR 100,000 The worst case is that they will be put in prison for at least one year Therefore, people pay more attention to pay sufficient taxes in time Interestingly, tax refunds are paid only after a full tax audit Therefore, care should be taken to avoid overpayment of taxes There is a double taxation avoidance agreement put into force since 10 th February 1999 This helps foreigners shelter in Indonesia to avoid paying double taxes on income earned in both their country and Indonesia As a result, the withholding tax will be lowered Tax amnesty is considered to be a decent way to reduce future tax evasion and encourage outbound investors to provide more and more money to domestic companies, leading to the improvement of living standards Indonesian shelters also enjoy a low rate of registration, and enforcement efforts should be complemented by developing a stronger culture of voluntary compliance built on trust and fairness Spouses may choose to file jointly or separately which requires couples with separate tax identification number to calculate the tax payable based on the combined family gross income, then report the tax payable in each tax return based on the prorated income This may increase the gender equality in this country 17 Individuals have their own Taxpayer Identification Number (TIN) so that it is more effective Cons of PIT in Indonesia Relatively few individuals must pay PIT Personal income taxes are charged on income at progressive marginal rates of 5%, 15%, 25% and 30% There is a standard tax allowance of IDR 54 million and additional allowances for dependents (up to one spouse and three children) In 2015 and 2016 the tax allowances were increased sharply to stimulate consumption: the threshold for beginning to pay tax jumped from 1.2 times average employee earnings in 2014 to just over twice by 2016, (and almost three times for taxpayers with a dependent wife and three dependent children) This substantially reduced the number of personal income taxpayers as well as effective tax rates In 2012, over half of all personal income tax revenues were paid by less than 0.5% of households According to the Ministry of Finance in Indonesia, in 2014, only 27 million people out of 255 million people had a tax code registration and only 900,000 people fulfilled their tax obligations In 2016, only 20 million taxpayers were obliged to file a return Income tax revenues have remained low According to OECD Economic Survey, income tax revenues amount to only 5% of GDP, relatively low to other emerging-market economies Personal income tax was around one-quarter of tax revenue in Indonesia The low share partly reflects the difficulties of taxing individual incomes in economies with a sizeable informal sector Besides, as mentioned above, the number of taxpayers in Indonesia is very low, which makes the government's revenue shortage Tax exemptions and deductions also narrow the tax base Fringe benefits paid to workers and employer allowances are not included as taxable income, which benefits high-income earners relative to low-income earners Important employees such as auditors, analysts and IT professionals are still in short supply Tax administration system in Indonesia is becoming more and more effective thanks to the application of information technology However, this requires many experts and skilled staff 18 to adapt to new technologies and challenges The lack of human resources in IT, analysts will make tax administration system reform more difficult IV RECOMMENDATIONS FOR A MORE EFFECTIVE TAXATION (ESPECIALLY PIT) SYSTEM IN VIETNAM Apply technology to improve all tax procedures At present, there are still many hindrances to effective PIT administration in Vietnam Some of them are untightened regulations related to tax completion process, creating holes in monitoring tasks In addition, there are too many difficulties for taxpayers, like lots of different documents and dossiers to prepare, and a complicated process to complete To resolve these problems, we suggest developing a tech-based online platform owned by the government, through which people can follow a fixed step-bystep procedure and accomplish their tax responsibility, in the quickest and easiest way With the electronic assistance, individuals’ personal income tax is calculated more precisely and databases are managed more simply, which strengthens monitoring and facilitates tax compliance In this way, the tax system as a whole can be improved Adjust the level of personal deduction and dependant allowances In Vietnam, the current level of personal deduction for taxpayers is VND million per month and each dependant allowance is VND 3.6 million per month We believe that these levels should not remain unchanged over time and all over the country As Vietnam has witnessed inflation every year (for example 3.54% in 2018, according to The World Bank) meaning the rise in both wages and prices of goods, those tax deductions should also be increased to suit people’s financial situations Besides, there is a gap in the living standards between urban regions and rural areas For instance, the salary of VND million may be enough to make one’s ends meet in the countryside, but not sufficient to sustain a family in a big city, which creates two different purchasing powers in two cases Therefore, the level of personal deduction and dependant allowances should be adjusted based on each region’s actual income circumstances and living standards 19 Decrease the number of tax brackets At present, Vietnam is applying progressive rates for personal income tax, which includes brackets with tax rates from 5% to 35% Although there are many tax rate levels but the gap between them is not very reasonable It is recommendable to adjust personal income tax rates as well as extend taxable income brackets to reduce the likelihood of applying inconsistent tax levels when calculating total income tax at the end of the year The number of tax brackets and the intervals between tax levels must be clearly determined Specifically, the Government may consider reducing the number of tax brackets from to 4-5 brackets to make it easier for personal income tax calculation, and to suit the general tendency of other countries in the world Apply exemptions for incomes after retirement Lastly, we suggest applying tax exemptions for people who still make an income (other than their retirement pension) after they retire from a job We believe that this will be an encouragement for those who have retired but still have conditions and want to participate in profitable activities like production, business or even science activities, especially for those aged 65 and over This act from the government will promote and create opportunities for the elderly to continue contributing in social and economic activities like many countries have done 20 CONCLUSION After the research and comparison, we realize that Vietnam's tax system still faces many shortcomings such as tax rates, tax calculation and collection methods, as well as family circumstances reduction, etc In order to improve this issue, many studies on people's living standards and other socio-economic issues are needed We cannot apply the entire tax system of any country into our country because of so many fundamental differences from institution to economic structure What we can is to go from the problems that are available in the system, refer to the methods of other countries in order to make changes that are appropriate to the characteristics of the country Due to the limited knowledge, our recommendations have not been completely suitable to the reality and the needs of citizens Hopefully, through this research, you will receive comments and suggestions from our teacher to improve our work 21 REFERENCE Ntrc.gov.ph (2015) Comparative individual income tax system of Asian member countries [online] Available at: http://www.ntrc.gov.ph/images/journal/j20150304b.pdf?fbclid=IwAR0F9deBlgZhBl nN1HXpH1rsOe7HO_AL8QWEPVrvDxAh3zGClBCgkfWM2n8 [Accessed 13 Dec 2019] Oecd.org (2018) OECD Economic Surveys: Indonesia 2018 [online] Available at: http://www.oecd.org/economy/surveys/Indonesia-2018OECD-economic-survey-overview.pdf [Accessed 13 Dec 2019] Pwc.com (2019) Indonesian Pocket Tax Book 2019 [online] Available at: https://www.pwc.com/id/en/pocket-tax-book/english/pocket-tax-book2019.pdf [Accessed 13 Dec 2019] 22 ... deductions from taxable business income in Indonesia and Vietnam 16 III PROS AND CONS OF PIT IN INDONESIA Pros of PIT in Indonesia Obviously, tax administration for individuals in Indonesia brings about... and business income is combined with other income and is taxable c Directors’ fees - Directors’ fees are included in taxable employment income d Investment income - Dividends paid to individuals,... Specific tax rates apply for income that is subject to final tax (Article 26 income tax, subject to a relevant tax treaty provisions) 10 Tax withholding A large part of individual income tax is