Indonesian Tax Law

Revision of the pro forma standard taxation system for small and medium-sized sole proprietors in Indonesia



Changes to the external standard taxation on UMKM as defined in Government Decree No. 23 of 2018

In Indonesia, small and medium sole proprietorship UMKM (Usaha Mikro, Kecil, dan Menengah) with an annual turnover of 4.8 Miliyar or less could opt for a separate tax (Final Tax) of 1% as Pro forma perpajakan standar, instead of a tax calculated based on the normal corporate income tax rate.

External standard taxation is a taxation method that calculates tax based on criteria that can be objectively judged from the appearance other than taxable income, such as the floor area of the company building, number of employees, and capital, and the basis for the Indonesian final tax is based on sales (omzet or pendapatan bruto).

The regime itself is like a uniformly fair business tax for business owners, but under PP Nomor 23 Tahun 2018 (Peraturan Pemerintah), effective from 1 July 2018, the separate taxation ratio will be reduced to 0.5%, while the period of application will be limited to a maximum of three years and after the fourth year, tax will be levied at the normal corporate income tax ratio.

  • In case the turnover is less than 4.8 Miliyar for the fiscal years 2018, 2019 and 2020, the corporate income tax can be either a separate taxation method (Final Tax) which is fixed at "turnover x 0.5%" or a comprehensive taxation method (Non-Final Tax) which provides a withholding tax deduction on "net profit before tax x 12.5%".
  • If the turnover is more than 4.8Miliyar, the tax will be calculated at the following normal corporate income tax rates and even if the turnover in 2018 is more than 4.8Miliyar and the turnover in 2019 falls to less than 4.8Miliyar, there is no going back to the separate taxation formula.
    1. No income tax in case of loss before tax.
    2. Annual sales less than 4.8Miliyar: 12.5% uniform rate
    3. Annual sales of more than 4.8Miliyar but less than 50Miliyar: between 12.5% and 25% based on the following formula
    4. Annual sales over 50 Miliyar: 25% uniform rate
  • The above tax rate is calculated using the following formula
    (Net benefit before taxation x 25%)-{(600juta x net benefit before taxation)/yearly sales}

Which is more profitable, the ordinary corporate income tax or the external standard tax?

Of course, in the case that net profit before tax is negative, in other words, the business deficit, because the corporate income tax is not imposed per taxable income 0, the usual method of income tax calculation is more advantageous.

If you are a small and medium-sized enterprise with a business surplus and turnover of less than 4.8 Milyar, you need to consider whether you would benefit from ordinary corporate income tax (non-final tax) or external standard taxation (final tax).

The corporate income tax is calculated using the following formula

  • Corporate income tax calculated by the normal formula
    = (net income before tax x 25%) - {(600 juta x net income before tax) / annual sales}

Separate taxation in the case of sales of 4.8 Miliyar, which is the maximum applicable limit of separation tax, is as follows

  • 4.8Miliyarx0.5%=24juta

The normal formula for calculating corporate income tax with a tax of 24 JUTA can be calculated using the following equation

  • 24juta = (net benefit before taxation x 25%) - {(600juta x net benefit before taxation)/4.8Miliyar}
    24juta = net benefit for the period before taxation (25%-600juta/4.8 Miliyar)
    Net benefit for the period before taxation = 192 juta

That is, only if the net profit before tax is 192 juta on sales of 4.8 miliyar will the separate tax amount and the tax be the same.

    • 192juta÷4.8Miliyar=profit margin 4%

If the profit margin is 4% or less, the calculation is that the normal corporate income tax rate is a good deal, but given that BCA Bank's term deposit interest rate as of July 2018 is 5% per annum, you would normally be better off opting for the separate tax rate of 0.5%.

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