Tax-Aware Start-ups Prove Millennial Contribution to the Nation

Gadgets, social media, and a cup of frothy coffee. Those are parts of the lifestyle, other than travel and fashion, that is often related to the millennial identity. The young generation is dominating the world's civilization, especially in Indonesia. Those three things are also frequently associated with the phenomenon of start-up businesses on the rise. 

Interestingly, the millennial way of life and the start-up business phenomenon are adapted into a Korean drama titled Start-Up, which is commercialized through streaming services. It is the story of Nam Do San—played by the famous actor Nam Joo Hyuk—with his ups and downs in starting his business. His company, Samsan Tech, finally reaped success after passing the best start-up competition run by a venture capitalist called Sandbox. 

This Korean fiction has spread its hype all the way to Indonesia. But what about the reality of start-ups in Indonesia? 

Firstly, it is necessary to emphasize the definition of a start-up. In the Startup Playbook (2012), David Kidder defines a start-up as a new business with an original idea that focuses on high growth, has measurable risks or returns, and is capable of leading the market. Meanwhile, programmer and writer Paul Graham on his page mentions that start-ups are companies designed to grow rapidly. 

Not every start-up can be considered one, though. Even though they are not specifically related to certain industrial sectors, start-ups tend to use technological approaches to boost their business. The keyword is innovation.  

The number of start-ups in Indonesia, as listed in Startup Ranking’s page, is estimated to reach 2,195 companies. Indonesia ranks fifth with the largest number of start-up companies in the world. 

Despite winning in numbers, in terms of value, Indonesian start-up companies are considered left behind. In fact, only one company out of thousands has the title of decacorn and only five are unicorns. Moreover, most of them rely on capital injections from foreign investors. 

Decacorn is the title for start-ups with a valuation of more than USD10 billion. While unicorn is a start-up with a company valuation of over USD1 billion. 

Questioning the Government Support  

Faced with the not-so-competitive situation of national start-up companies, the Government does not remain silent; as they should. Various efforts have been made, ranging from changing ministers and appointing cadres of political parties as related officials, to issuing various policies and fiscal incentives. The last point related to policies and incentives is the most relevant support needed by business actors in general, especially in supporting the 1000 Digital Start-Ups Movement. 

A number of fiscal policies that support the national start-up ecosystem is included in the Omnibus Law package. Despite the controversial emergence of the Omnibus Law, for foreign and domestic investors, most of the substance is sufficient to provide a breath of fresh air for the business world. Starting from reducing corporate income tax rates, exempting dividends from taxes to relaxing tax holiday provisions. 

The tax holiday is a facility that provides a reduction to an exemption of income tax for investors in certain business sectors for up to 20 years and can be extended. This government's generosity is actually the most inconsistent policy since it was first implemented in Indonesia in 1967. At the beginning of the New Order, the tax holiday policy lasted only three years before being revoked in 1970. 

The tax holiday regime was then revived in 1996 through a policy of corporate income tax borne by the government for 10 years. This facility was revoked again in 2000, before being reenacted in 2007 under the leadership of President Susilo Bambang Yudhoyono. 

The government's tug-of-war game is also reflected in the low utilization of the tax holiday in the early days of the last reincarnation. Either because the facilities are not attractive or the requirements are too complicated, if we recall what had happened in the middle of 2011, only three to five companies were practically granted this facility, after months of just being nominated. 

It was Indonesia's Ease of Doing Business (EoDB) ranking that has slumped which triggered Joko Widodo's administration to relax the criteria for the pioneer industry and tax holiday requirements. With the aim of increasing (the rank of) the ease of doing business in Indonesia, the government has lowered the minimum limit of invested capital and increased the number of business areas that are categorized as pioneer industries. In fact, the Minister of Finance—who is known to be very prudent when it comes to providing facilities—was forced to hand over the authority for granting tax holidays to Indonesia Investment Coordinating Board (BKPM). 

Pioneer Industry is an industry that has broad linkages, provides high added value and high externality, introduces new technology, and has strategic value for the national economy. Eighteen industries are classified as pioneer industries. One of those is the digital economy, which involves data processing, hosting, and related activities. 

At present, only with a minimum new capital of IDR100 billion, investors with Indonesian legal status may apply for a tax holiday, certainly by meeting the criteria of pioneer industry and other standard requirements such as meeting the debt-to-equity ratio requirements for tax purposes (4:1), realizing new investment plans no later than one year after the application is granted, and enclosing a Tax Clearance Certificate (SKF) of all shareholders in the articles of incorporation or the last articles of amendment. 

Back to competitiveness, it is now the momentum for local start-ups to be able to take advantage of the tax holiday facility. Business pioneers may obtain the exemption of corporate income tax if the capital invested reaches IDR500 billion or more. Even if not reaching that amount, as long as the initial capital is above IDR11 billion, start-ups can get a reduction of corporate income tax up to 50% of the tax payable. Regarding the facility period, it is adjusted to the minimum amount of invested capital, which is a maximum of 20 years for a minimum capital of IDR30 trillion or more or a maximum of five years for a capital range of IDR100 billion to IDR1 trillion. If the period ends, the facility can be extended—in case no provision (regime) of the tax holiday is changed. 

Consequences of Choice 

With a new tax holiday format, there is little hope for start-ups. Because, if the tax holiday application is granted, start-ups can significantly save the tax burden which will greatly assist the cash flow of the company to reach the expected high valuation. Moreover, expenses related to collecting, obtaining, and maintaining income can be expensed on a fiscal basis, as provided for in Article 6 of the Income Tax Law. 

However, what needs to be considered from this facility is how much tax reduction can be utilized. As we know, the average start-ups (including digital start-ups) have a business strategy to reach the break-even point or even profit of around 5-10 years, or longer. During this period, start-ups generally penetrate the market by "burning cash" (burn rate). The goal is to gain significant market share amid the fierce competition with well-established companies.? 

As a matter of fact, businesses can only use the corporate income tax reduction facility when they start commercial production or once all new investment plans have been implemented. For instance, if the profit is reached in the fifth year, the tax holiday will actually be useful in the remainder of the following year. Because, in the first to fourth years, no commercialization for profit occurred. 

Alternatively, start-up companies that do not make use of the tax holiday may use the final income tax facility for those with certain revenue at a rate of 0.5% of revenue. The condition is that the revenue is not more than IDR4.8 billion a year. The maximum period for the imposition of this final income tax is four years for corporate taxpayers other than Limited Liability Companies (PT) and a maximum of three years for taxpayers with the status of PT. However, the expenses related to collecting, obtaining, and maintaining income incurred by the taxpayer cannot be expensed because the income tax paid is final. Apart from that, the relatively short period of time also needs to be considered in using the facility. 

Good Start-Up Pays Tax  

Regardless of the facilities that will be used, one certain thing is that start-ups run by millennials are obliged to comply with the prevailing tax regulations. As taxpayers, of course we all understand and comply with the tax obligations inherent in our daily lives: income tax, Value Added Tax (VAT) & Sales Tax on Luxury Goods (STLG), land and building tax, import duties, export duties, excise, local taxes, and other levies. 

Related to digital-based start-ups, the application of taxes on electronic transactions (including income tax and VAT) in the Omnibus Law volume I must be considered. Effective as of 1 July 2020, domestically commercialized digital products are subject to 10% VAT. Starting from social media developers, digital content providers, to traders of goods and services through e-commerce—all of them cannot avoid the obligation to collect and pay the VAT. Meanwhile, those related to income tax and electronic transaction taxes are still awaiting a global consensus, although the provisions have been promulgated. 

In essence, either consciously or unconsciously, start-up business actors, who on average are included in the millennial category, contribute significantly to taxes in today's digital age. 

So, if anyone asks "what is the contribution of millennials to the nation and the country?" the answer is start-ups, as the proof of the contribution of millennials that are solution-maker, innovative, and tax-aware. 

 

 

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