Final Tax on MSME, Incentive or Disincentive?

Entrepreneurs of Micro, Small, and Medium Enterprise (MSME) become the main target of taxation extensification program this year. The issuance of Government Regulation Number 23 Year 2018 becomes the policy reinforcement especially for Taxpayers with revenue less than IDR4.8 billion per year. The extra is the final income tax rate that is cut from 1% to 0.5%.

However, the 0.5% final income tax rate is only an option that can be selected by MSME Taxpayers, other than using the normal rate that is stipulated in Article 17 of Income Tax Law. There are terms and conditions as well as the period that shall be considered by MSME who choose the 0.5% final tax rate. It is because that not all Taxpayers and business types may utilize this cheapest tax facility.

First, the Taxpayers shall ensure that the received incomes are not generated from independent works; incomes from overseas that have been subject to tax; incomes that are subject to final income tax under other regulations; and incomes that are not categorized as tax object.

Second, Government Regulation Number 23 Year 2018 stipulates the Taxpayers who are prohibited to use the 0.5% final income tax rate i.e. (1) Taxpayers who opt to be subject to normal income tax rate; (2) Corporate Taxpayer established by Individual Taxpayer who provides service related to independent works; (3) Corporate Taxpayer obtaining taxation facility pursuant to Article 31A of Income Tax Law and Government Regulation Number 94 Year 2010; and (4) Taxpayer in the form of Permanent Establishment (PE).

Third, there is limit on the utilization period of 0.5% final income tax rate in which the period is adjusted to the Taxpayer’s characteristics, both the new and the existing (Taxpayers). For Individual Taxpayer, the maximum period is seven years; for Corporate Taxpayer with Limited Liability Company (LLC) status, three years at maximum; while Taxpayer in legal body form i.e. CV, firm, or cooperative, no longer than four years. After such period, the provision of normal income tax is automatically applicable in which the application of its rate is progressive.

Fourth, the limit of revenue value of less than IDR4.8 billion applies for the income of the husband-wife Taxpayers whether the assets as well as the taxation right and obligation are combined or separated. The same applies to Corporate Taxpayer consisting of several business branches, the mechanism of revenue value calculation is conducted by combining incomes from all business branches.

The Potential of Revenue

Looking at the trend of the last five years, the number of MSME Taxpayers has been increasing significantly, i.e. growing more than quintuple. If in 2013 there were 220,000 MSME registered as Taxpayers, in 2017 it reached 1.5 million MSME Taxpayers. 

The increase of the number occurred along with the payment of MSME final income tax that significantly rocketed, from only IDR428 billion in 2013 to IDR5.8 trillion in 2017. It is surely connected with the implementation of the 1% final income tax policy that is stipulated in Government Regulation Number 46 Year 2013, before replaced by Government Regulation Number 23 Year 2018. 

However, in view of tax compliance side, the number of MSME Taxpayers is still very small if compared with the total 59.2 million MSME entrepreneurs who earn incomes in Indonesia.  It means that the basis of MSME tax data owned by Directorate General of Taxes (DGT) has only covered approximately 2.5% of real population. As a result, the overall contribution of MSME final income tax to tax revenue is still very minor, which is 0.29% in the period of the last five years.

At least, the analysis of data above describes how great the tax potential is from MSME sector that has not been optimally explored. However, it should be admitted that MSME is the Taxpayer who is hard to tax, especially for MSME massively engaging in economy sectors that are out of tax (underground economy).

There are many factors causing MSME hard to tax, among others: (1) the large amount that makes it difficult to monitor; (2) the value of income that is low; (3) no bookkeeping held; (4) majority sales transactions made in cash; thus (5) making it easy to hide the income. 

The government’s policy to cut the final income tax rate to 0.5%—which is overshadowed by the implementation of progressive tax at the same time—can be the solution to expand the tax basis as well as to increase the achievement of tax revenue from MSME sector.

With the existence of utilization of final income tax deadline, this policy is also expected to educate MSME to be more compliant with the administration and taxation. Nevertheless, the good financial management is important for MSME to “get to the next level” and access the bank loan. 

In Light of Equity

At a glance, the policy becomes a good news for Taxpayers having revenue less than IDR4.8 billion—who are mostly the entrepreneurs of MSME. It is because, previously, there was no option for them but to use the 1% final income tax rate. By the issuance of Government Regulation Number 23 Year 2018, there is at least an option whether to use the lower income tax rate (0.5%) or the normal income taxe rate (progressive).

In point of fact, this policy becomes an incentive for MSME Taxpayers to be beneficial from the cheap income tax rate but only for predetermined period. Also during such period, MSME Taxpayers who have selected the 0.5% final income tax may no longer change into using the normal income tax rate. Thus, even though the business suffers from loss, the 0.5% final income tax is still imposed on the received revenue.

If the period ends, the Taxpayers are automatically enforced to utilize the provision of normal income tax under progressive rate. If the Taxpayer’s income grows as expected, it surely does not matter. The new problem arises if MSME who is eager to use this cheap tax facility, in fact, until the predetermined period fails to “get to the next level”. Instead of expecting the incentive, what they get is disincentive.

Therefore, the implementation of equity principle becomes a matter of concern in the implementation of 0.5% final income tax policy. Remember that ideally, every Taxpayer pays tax based on the economic ability in which the basis shall be net income that is appropriate to be taxed (taxable income).

Loopholes for Violation

Every policy basically aims at good outputs, even though the implementation is not always perfect. However good the regulation is made, it often still leaves space for legal loopholes potentially used by tax evaders. The same applies to Government Regulation Number 23 Year 2018, the Tax Authority shall be more attentive in seeing the possibility of tactics by deceitful Taxpayers against this final income tax policy.

The mode potentially done by “bad” Taxpayers is by establishing new business entity with the scale of revenue under IDR4.8 billion. Meanwhile its previous business—which shall be subject to income tax with normal rate—is intentionally left.

Another Taxpayer’s trick that should be considered by tax officer is to split the business whose revenue is above IDR4.8 billion into several small-scale business entities. Thus, the said Taxpayer can still be included in the category of MSME that may utilize the 0.5% final income tax rate.

To conclude, the business monitoring and mentoring should absolutely be performed by the government. It may not be that easy, but if the mechanism of MSME final income tax withholding can run on each transaction, it will be easier for DGT to conduct the monitoring.  

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.