ADB SME DEVELOPMENT TA BACKGROUND REPORT SME CONSTRAINTS IN TAXATION SYSTEM (SYNOPSIS, FINDINGS, RECOMMENDATIONS) KAI HAUERSTEIN, FRANK NIEMANN MAY 2002 Published by: ADB Technical Assistance SME Development State Ministry for Cooperatives & SME Jalan H.R. Rasuna Said Kav.3 Jakarta 12940 Tel: ++62 21 520 15 40 Fax: ++62 21 527 94 82 e-mail: [email protected] ADB SME DEVELOPMENTTA I. TABLE OF CONTENTS I. TABLE OF CONTENTS ...........................................................................................I II. TABLE OF ABBREVIATIONS .............................................................................. IV III. TABLE OF FIGURES ............................................................................................. V IV. TABLE OF REFERENCES ................................................................................... VI V. EXECUTIVE SUMMARY ENGLISH ..................................................................... VII VI. EXECUTIVE SUMMARY BAHASA INDONESIA................................................XIV 1 WHY THIS REPORT IS WRITTEN/ SCOPE OF WORK.........................................1 2 SYNOPSIS OF BUSINESS RELEVANT TAX LAWS IN INDONESIA....................3 2.1 OVERVIEW AND FOCUS ........................................................................................3 2.2 INCOME TAX (REVISED ACCORDING TO LAW NO.17 OF 2000) .......................5 2.2.1 General..................................................................................................................5 2.2.2 Tax subjects ..........................................................................................................6 2.2.3 Tax Objects ...........................................................................................................7 2.2.4 Calculation of Net Income .....................................................................................9 2.2.5 Tax Base .............................................................................................................12 2.2.6 Tax Calculation (Tax rates) .................................................................................13 2.2.7 Withholding Taxes...............................................................................................15 2.3 VALUE ADDED TAX..............................................................................................21 2.3.1 Tax Subject .........................................................................................................21 2.3.2 Tax Object ...........................................................................................................21 2.3.3 Tax Base .............................................................................................................24 2.3.4 Tax Tariff .............................................................................................................24 I ADB SME DEVELOPMENTTA 2.3.5 Computing of VAT Liability ..................................................................................25 2.3.5.1 Tax Credit Method ...........................................................................................25 2.3.5.2 Exemptions from final VAT Liabilty ..................................................................25 2.3.6 Procedures..........................................................................................................26 2.4 SALES TAX ON LUXURY GOODS (SLG) ............................................................27 2.5 TAX OF TRANSFER OF LAND AND BUILDING (TTLB) .....................................29 2.6 GENERAL RULES AND PROCEDURES OF TAXATION.....................................30 2.6.1 Taxpayer’s General Obligations towards Tax Authorities ...................................30 2.6.1.1 Registration Requirements ..............................................................................30 2.6.1.2 Documentation Requirements .........................................................................31 2.6.1.3 Requirements to Self Assessment...................................................................32 2.6.2 Mechanisms of Tax Authorities to Examine Tax Compliance .............................34 2.6.2.1 Verification.......................................................................................................34 2.6.2.2 Audit.................................................................................................................35 2.6.2.3 Investigation.....................................................................................................36 2.6.3 Legal Protection ..................................................................................................36 2.6.4 Summary: penalties, surcharges, interests and fines..........................................37 3 FINDINGS AND ISSUES FOR DISCUSSION.......................................................38 3.1 TAX POLICY ..........................................................................................................38 3.1.1 Exemptions and indirect Incentives for SMEs .....................................................38 3.1.2 Non Existence of SME Definition ........................................................................40 3.1.3 Foreseen direct Tax Incentives often irrelevant for SMEs...................................40 3.1.4 Regional Autonomy.............................................................................................41 3.2 GENERAL OBSERVATIONS ON THE INCOME TAX LAW .................................41 3.3 SPECIFIC OBSERVATION ON INCOME TAX: SME´S OPERATING AS SOLE TRADERS PAY LESS INCOME TAX THAN CORPORATIONS ...............43 3.4 GENERAL OBSERVATION ON THE VAT AND SALES TAX ON LUXURY GOODS LAW ........................................................................................................44 3.5 PERCEIVED CORRUPTION ..................................................................................45 II ADB SME DEVELOPMENTTA 3.6 LOW TAX COMPLIANCE AND KNOWLEDGE.....................................................45 3.7 OBSERVATIONS ON GENERAL RULES AND PROCEDURES..........................47 4 AGENDA FOR RECOMMENDATIONS ................................................................48 4.1 RECOMMENDATIONS TO PREPARE THE GROUND FOR TAX POLICY IMPROVEMENTS..................................................................................................48 4.2 RECOMMENDATIONS TO IMPROVE THE IMPACT AND AWARENESS OF INCOME TAX ........................................................................................................48 4.3 RECOMMENDATIONS TO INCLUDE SME IN THE VAT SYSTEM......................49 III ADB SME DEVELOPMENTTA II. TABLE OF ABBREVIATIONS ADB Asian Development Bank BPKP State Audit Authority CV Commanditair vennotschap = Limited partnership DGT Directorate General for Taxes GR Government Regulation IPEDA Iuran Pembangunan Daerah = Local Wealth Tax JDP Jenderal Directorate Pajak PND Perusahan Non Directori PPh Pajak Perhasilan = Income Tax Law PPN Pajak Pertambahan Nilai Barang PPnBM Pajak Penjualan atas Barang Mewah PT PerseroanTerbatas = Limited liability company SME Small and Medium Enterprise TA Technical Assistance TKUdTCP Tentang Kententuan Umum Dan Tata Cara Perpajakan = Law on General Rules and Procedures of Taxation URT Usaha Rumah Tangga UU Undang Undang = Law VAT Value Added Tax IV ADB SME DEVELOPMENTTA III. TABLE OF FIGURES Figure 1: Depreciation methods and rates according to Article 11 PPh......................10 Figure 2: Tax Tariffs Before and After the 2000 Tax Reform ......................................13 Figure 3: Income Tax Payable by Individual Tax Payers, Before and After the Tax Reform 2000.................................................................................................14 Figure 4: Income Tax Payable by Corporate Tax Payers, Before and After the Tax Reform 2000................................................................................................15 Figure 5: Overview Withholding Taxes........................................................................18 Figure 6: Other services subject to PPH 23 Withholding Tax and their respective Tax Rates ....................................................................................................20 Figure 7: Examples of VAT exempted goods/services................................................22 Figure 8: Luxury Tax on Goods...................................................................................28 Figure 9: Exemptions / Incentives ...............................................................................38 Figure 10: Comparison income tax tariffs between Sole Trader and corporations ......43 Figure 11: Tax Compliance according to ADB TA Survey ............................................45 Figure 12: Income Tax Forms received between 1995-1997 ......................................46 V ADB SME DEVELOPMENTTA IV. TABLE OF REFERENCES Author Title Anonymous Home page Directorate Genderal for Taxes (DGT) in the Ministry of Finance, http://www.pajak.go.id/profil/grafik_statistik Anonymous 1996 Economic Census, Profile of Establishment with Legal En- tity, Badan Pusat Statistic, Jakarta, 1996 Anonymous Profil Usaha Kecil dan Menengah Tidak Berbadan Hukum, Badan Pusat Statisitk, Jakarta, 1999 Anonymous Tax Flash Vol. 04/2002, Vol.03/2002, Vol.02/2002, Vol. 08/2001, Vol. 07/2001, Vol 06/2001, Vol. 04/200, Vol. 13/2000, Price Waterhouse Coopers, Dr. Hadi Sutanto & Rekan, Jakarta, 2000, 2001, 2002. Harvey Galper and Investment Tax Incentives: Recent Indonesian