House approves tax harmonization law, introduces carbon tax
The House of Representative passed the amendment of the 1983 General Taxation Law (KUP) on Thursday and renamed it the Tax Harmonization Law (HPP) Law.1 The fifth amendment of the KUP Law, the HPP Law carries several changes and a set of bold strategies, ranging from introducing a carbon tax rate to the extension of ID card (KTP) numbers as tax identity numbers (NPWP).
The HPP Law introduces a number of significant changes to the country’s existing tax regime. Among them are the expansion of income tax brackets to five brackets, covering incomes ranging from Rp 60 million (US$4,223) to more than Rp 5 billion; the introduction of a multitariff value-added tax (VAT), ranging from 5 to 20 percent; another tax amnesty; the introduction of a carbon tax on purchases of carbon-containing goods and carbon-emitting activities; and additional functions to people’s citizenship identification numbers (NIK) as NPWP to expand tax coverage. (See what’s more)
The law, however, surprisingly removed the provisions on alternative minimum tax (AMT), which initially targeted corporations that have reported losses for several consecutive years. There was speculation that the sudden removal of the AMT was made under pressure from certain business players. A circulating opinion claimed the proposal to revoke the AMT and the much lower carbon tax rate were made under negotiations to compensate for the government’s retaining of the corporate income tax rate of 22 percent instead of 20 percent.2 Many found it an unusually quick process and question whether some policies were made under duress.
Deliberations around the fifth amendment of the 1983 KUP Law proceeded quite fast. At the start, the government targeted to finish the legislation by October this year — seen as a nearly impossible timeline by many. The House’s passage of the HPP bill into law on Thursday refuted such doubts.
The HPP Law went through only an extremely brief legislation process. The bill’s problem inventory list (DIM) was submitted only on Sept. 6. Three weeks later, Finance Minister Sri Mulyani Indrawati and House Commission XI leaders shook hands to bring the bill to the House plenary session.3 And on Thursday, the House approved it into the law, with the Muslim-based Prosperous Justice Party (PKS) the only party opposing it.4
Income tax
Chapter III Article 17 imposes a new personal income tax (PPh) rate structure with a higher upper limit of the lowest bracket at Rp 60 million. On top of that, the government has set thresholds for non-taxable income to Rp 54 million for single taxpayers (with an additional Rp 4.5 million for married taxpayers), another Rp 54 million for women whose income is reported together with their spouse and an additional Rp 4.5 million for each biological dependent.5
Meanwhile, corporate income tax (PPh Badan) will be levied at 22 percent starting next year. The rate is 2 percent higher than that the figure proposed in the KUP bill (20 percent). A three percent reduction applies for those going public, enlisting at least 40 percent of their shares in the Indonesia Stock Exchange (IDX) and fulfill certain requirements. This is coupled with the last-minute cancellation of the Alternative Minimum Tax (AMT) previously proposed in the KUP bill at 1 percent of turnover —reportedly due to the complexity of its implementation and potential distortionary impact.6
Value-added tax
The law introduces a multitariff VAT, which is stipulated in Chapter IV Article 7 and will be applied using a phase-in approach: 11 percent starting on April 1, 2022, before rising to 12 percent starting on January 1, 2025. These rates are subject to changes within the range of 5 to 15 percent to be set later in a relevant government regulation (PP). The article also imposes a 0 percent VAT on exports of goods and services.7
The law’s article 16B revised the list of objects previously set as VAT-free in Law No. 42/2009. Out of 13 items that would no longer be VAT-free, eight items that are deemed “essential to national development” would be partially exempted from VAT, including essential goods, education services, health services and social services. Partial VAT exemption of those items would specifically target unessential types of services and more expensive types of goods normally purchased by wealthier consumers.8
Tax amnesty
Chapter V Article 5 proposes a new round of the tax amnesty, dubbed the Taxpayers Voluntary Disclosure Program, which entails two reporting schemes. The first scheme includes taxpayers’ assets obtained prior to the first tax amnesty, covering the period from Jan. 1, 1985, to Dec. 31, 2015. The second scheme covers reporting of assets earned after the first tax amnesty, that is, from Jan. 1, 2016, to Dec. 31, 2020. Effectively running for six months from Jan. 1, 2022, to June 30, 2022, the program will impose a certain tariff-like structure that treats reported assets as additional income.9 10
Carbon tax
Chapter VI oversees carbon tax, which will be imposed on purchases of carbon-containing goods and carbon-emitting activities. The tax will be implemented in a mixed scheme covering both tax collection and a cap-and-trade system (carbon trading) with a fee of Rp 30 per kilogram of CO2 equivalent (CO2e) —much lower than initially proposed in the KUP bill (Rp 75/kg CO2e). The tax rate also serves as a minimum price whenever the CO2e price falls below that level in the carbon market.11
The law imposes a lower tax liability on taxpayers who have participated in the carbon trading scheme. In practice, the tax would be implemented gradually. The government would start establishing a mechanism for carbon trading this year, then in 2022-2024, it would start enforcing a cap-and-tax system for coal-fired power plants. From 2025 and beyond, carbon trading would be implemented at full scale and enacted in other sectors.12
NIK as NPWP
The HPP Law also establishes several taxation-administration reforms to boost tax compliance. Article 2(1a) assigns additional functions to the NIK as an NPWP. Data synchronization would involve multiple relevant ministries. Article 44B says the government could terminate investigations into tax crime cases whenever the targeted taxpayers hand over designated payments and fines and attach tax payment evidence/receipts within the designated timelines.
Rate structure in the taxpayer voluntary disclosure program
|
Category |
Rate |
|
|
First scheme |
Second scheme |
|
|
Assets invested in primary sector, renewable energy sector or govt's obligation |
6% |
12% |
|
Assets invested neither in primary sector, renewable energy sector nor govt's obligation |
8% |
14% |
|
Repatriated assets which are invested in primary sector, renewable energy sector or govt's obligation |
6% |
12% |
|
Repatriated assets which are invested neither in primary sector, renewable energy sector nor govt's obligation |
8% |
14% |
|
Unrepatriated assets |
11% |
18% |
Rate structure in personal income tax (PPh)
|
Bracket |
Rate |
|
≤ Rp 60 million |
5% |
|
> Rp 60 million - Rp 250 million |
15% |
|
> Rp 250 million - Rp 500 million |
25% |
|
Rp 500 million - Rp 5 billion |
30% |
|
> Rp 5 billion |
35% |
List of goods and services partially exempted from VAT
|
Item |
Partially exempted from VAT |
Notes |
|
Essential goods |
Yes |
Cheaper types only |
|
Healthcare |
Yes |
Items covered by JKN and essential services not covered in JKN |
|
Social services |
Yes |
|
|
Financial services |
Yes |
|
|
Insurance |
Yes |
|
|
Education |
Yes |
School-based education only |
|
Domestic public transportation |
Yes |
|
|
Labor services |
Yes |
|
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