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Key Points of The Harmonized Tax Law

Saturday, 09 October 2021

Key Points of The Harmonized Tax Law

The government and the House of Representatives completed the discussion on amendments to the General Provisions and Taxation Procedures Law by ratifying the Harmonized Tax Law (HPP) in the House Plenary Meeting, Thursday (7/10/2021).

The amendment and harmonization through the Omnibus Law scheme target the Law on Taxation General Provisions and Procedures (KUP); Income Tax Law (PPh); Law on Value Added Tax and Sales Tax on Luxury Goods (PPN & STLG);  and the Excise Law.

Here are the key points of the Harmonized Tax Law:

Single Identity Number (NIK) Replaces Tax ID Number (NPWP)

One of the new initiatives is the functioning of the Single Identity Number as the Taxpayer Identification Number (NPWP) for domestic individual taxpayers.

This policy aims to integrate demographic data with taxation databases. To that end, the Minister of Home Affairs is mandated to provide population data and reverse data (data balikan) from NIK users to the Minister of Finance. 

Further provisions regarding the use of NIK as NPWP will be regulated through the Minister of Finance Regulation (PMK).

VAT Rate to Rise, Special Rates Will Follow

The general VAT rate will increase gradually starting next year, from 10% to 12%.
In the first stage, the VAT rate will increase to 11% as of April 2022, then rise to 12% no later than January 2025.

However, the government is also authorized to change the VAT rate to a minimum of 5% and a maximum of 15% with the approval of the House.

Not only that, but the government will also apply a special final VAT rate - such as Goods and Services Tax (GST) - on certain types of goods / services or certain business sectors. 

13 Goods & Services are No Longer Tax-Free

In addition, the government and the House also agreed to abolish certain types of goods and services that have not been subject to VAT, including basic necessities, health services, financial services, and educational services. With the abolition, it will increase the types of goods and services that can be taxed by the government.

The following is a list of goods and services that are no longer VAT-free: 

  • mining products or drilling products taken directly from the source; 
  • medical health services;
  • social services;
  • mail delivery service with stamp ;
  • financial services;
  • insurance services;
  • educational services;
  • non-advertising broadcasting services;
  • public transportation services on land and in water as well as domestic air transportation services which are an inseparable part of foreign air transportation services;
  • labor services;
  • public telephone services using coins;  and
  • money remittance service by postal money order.

However, the government guarantees that they will provide facilities for exemption or reduction of VAT on goods/services that are closely related to the lives of many people.

In other words, there is a change in the taxation scheme from what was originally included in the non-taxable goods/non-taxable service category to become VAT exemption. Especially for basic necessities, health services, educational services, social services, and several other services.

Corporate Income Tax Rate Cut to 20% is Cancelled

The government and the DPR canceled the plan to reduce the corporate income tax rate from 22% to 20% starting in 2022.

The corporate income tax rate reduction scheme previously mandated by the Job Creation Law was automatically canceled with the passing of the Harmonized Tax Law, which confirmed that the corporate income tax rate remained at 22%.

Income Tax Rate Layer is Added

If so far there are four layers of income tax rates for taxable income, with the enactment of the Harmonized Tax Law then the number increases to five. 

The HPP Law also widens the range of individual taxable income with the lowest rate (5%) to up to IDR 60 million, from IDR 50 million previously.

Formerly, the highest layer of income tax rate was 30%, which was imposed on the income of more than IDR 500 million a year.

In the Harmonized Tax Law, the highest income layer is increased to more than IDR 5 billion a year, with the income tax rate set at 35%. (See table)

Income Tax Law (Old) Harmonized Tax Law (New)
 Taxable Income Tariff Taxable Income Tariff
Up to IDR50 million 5% Up to IDR 60 million 5%
> IDR50 million - IDR250 million 15% > IDR 60 million - IDR250 million 15%
> IDR250 million - IDR500 million 25% > IDR250 million - IDR500 million 25%
> IDR500 million 30% > IDR500 million - IDR5 billion 30%
  - > IDR5 billion 35%

 
Tax Amnesty Volume II

The government will repeat the tax amnesty policy for six months (1 January-30 June 2022), with a new label named the Voluntary Disclosure Program (VDP).

For tax amnesty I (2016-2017) participants who have not reported the 2015 acquisition assets backward must pay the final PPh as a tribute or redemption, which is divided into the following three categories of assets and rates: 

  • 11% for asset declaration abroad
  • 8% for repatriation of foreign and domestic assets;  and
  •  6% for repatriation of foreign and domestic assets invested in the state bond market, downstream industry, and renewable energy sector.

The second policy is intended for individuals—not corporate—who have not reported 2016-2020 acquired assets in the Tax Return. Unlike former participants of tax amnesty, VDP participants are subject to tribute or final income tax at a higher rate.

  • 18% for asset declaration abroad
  • 14% for repatriation of foreign and domestic assets;  and
  • 12% for repatriation of foreign and domestic assets invested in the state bond market, downstream industry, and renewable energy sector.

Tax-Free Revenue Circulation is Pegged at IDR 500 million

The Harmonized Tax Law stipulates the limit of non-taxable business circulation of IDR 500 million. Thus, individual entrepreneurs who calculate income tax with a final rate of 0.5% and have a gross circulation of up to IDR 500 million a year are not subject to income tax. 

This policy eases the tax burden of small businesses (MSMEs) because it makes the taxes paid lower than before. 

Carbon Tax

The government also has the approval to start collecting carbon taxes starting in 2022.

The carbon tax rate is set at IDR 30 per kilogram of CO2 equivalent (Co2e) or lower than the government's proposal of IDR 75 per Co2e.

Alternative Minimum Tax is Canceled

The government's plan to be able to tax companies that avoid taxes under the pretext of loss has foundered after the House rejected the application of the minimum corporate tax or the Alternative Minimum Tax (AMT).

AMT was canceled after the proposed clause was removed from the Harmonized Tax Law.

The Arrest Authority for Investigators is Cancelled

Apart from AMT, the government's proposal to allow tax investigators to own firearms and arrests tax crime suspects was also canceled.

Previously, the government requested that tax investigators be given the authority to arrest independently - without having to coordinate with the police - against tax crime suspects.

The government also proposes that tax investigators may be equipped with firearms in carrying out their duties. However, the proposal once again was turned down by the House with the removal of this clause in the Harmonized Tax Law.


 

Draft Final Rancangan Undang-Undang Harmonisasi Peraturan Perpajakan

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