Deciphering Indonesia’s e-commerce tax polemic

The new regulation will take effect on April 1, 2019

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Deciphering Indonesia’s e-commerce tax polemic

Last week, Indonesian Finance Minister Sri Mulyani released a new tax regulation (PMK-201) that targets trading activities in electronic systems. This prompted push-back from the e-commerce industry, which fears regulatory hurdles will discourage aspiring entrepreneurs from selling online.

One of the regulation’s requirements is that all sellers or merchants on online platforms must have a tax payer number (NPWP).

Sellers with profits under IDR 4.8 billion (US$339,000) per year are subjected to a 0.5% tax. Those whose profits are higher will be designated as taxable entrepreneurs (PKP) and will have to follow valued-added tax (VAT) rules.

The Tax Directorate has explained that this regulation was made with the aim of maintaining equal treatment between e-commerce and conventional trade, according to local media. The new regulation is supposed to go into effect by April.

Responding to this, the Indonesian E-commerce Association (iDEA) requested the government to reconsider the regulation as it would hamper the growth of micro, small and medium-sized enterprises (MSME). Most sellers in e-commerce platforms at this time fall into the micro-enterprise category. “We are worried that this will be a serious entry barrier that undermines the public’s motivation to open a business,” iDEA chairman Ignatius Untung told KrASIA. Another worry is that stricter rules for joining platforms incentivise merchants to rely on informal online channels like social media to conduct sales, which is much riskier for both buyer and seller.

According to a study by iDEA, 80% of 1,765 e-commerce sellers in 18 Indonesian cities are categorised as micro businesses with profits below IDR 300 million (US$21,226) per year, while 15% of sellers are categorised as small businesses. Only 5% of them are medium-sized. Therefore, a good 80% of sellers on e-commerce platforms are still struggling and in the process of refining their business models before they can grow their business.

The regulation also forces marketplace platforms to become a tax deposit agent, which in effect makes them an extension of the Directorate General of Taxes with duties to collect, record, and deposit tax data for the government. Marketplace players have so far opposed this, as they would have to prepare the technical infrastructure and additional expenditure for this.

“We as e-commerce players feel burdened with this policy especially because [the systems needed] to meet those obligations are not ready,” Untung said.

On Monday, January 14th, iDEA met with relevant stakeholders from the government to discuss the matter.

The meeting resulted in five amendments to the e-commerce tax regulation.

First, sellers or merchants who conduct business through marketplace platforms are no longer required to have a tax ID. Instead, they only need to register their citizen ID number (KTP).

Untung sees this as a positive development. “We were worried that everyone who wants to sell online must have a tax ID, which could be a barrier for those who just start a business so we’re quite happy with this adjustment.” iDEA and the ministry agreed that this alteration would protect micro and small businesses from tax obligations.

Another important point is the issue of data collection for the tax office. The regulation now makes clear that the aim is to gather more data on the e-commerce industry, and not to directly claim taxes from individual sellers. It also states that there will be equal treatment between conventional entrepreneurs and e-commerce sellers in taxation matters. Untung hopes this way, online sellers won’t switch to social media platforms to stay below the radar of officials.

Both sides also agreed to simplify data reporting for e-commerce platform operators by enlisting the help of the Central Bank and the Central Statistics Agency. They agreed on standardised procedures for importing shipments, which will give buyers price certainty, and sellers will be able to import their goods more conveniently.

The complication of e-commerce tax regulation in Indonesia

The dispute about e-commerce tax is not new in Indonesia. Since it was first announced, the implementation of tax collection for e-commerce was seen as too complicated in practice, because e-commerce can take on many different forms.

For example, if a transaction is cross-border, it would fall under the purview of a tax treaty with another country, Arif Yanuar from Indonesia’s Directorate General of Tax told local media.

In any scenario, reliable infrastructure is crucial to expediting the e-commerce tax process.

Finance Minister Sri Mulyani conceded that e-commerce taxation is a sensitive matter in Indonesia, which means regulations need to be arranged carefully to avoid disturbing Indonesia’s investment climate in the digital economy.

“As the Minister of Finance, I must maintain the investment climate. The taxation problem isn’t easy,” Mulyani said to the press after attending a meeting yesterday afternoon. She promised not to complicate the tax reporting process for MSMEs and e-commerce players, but re-iterated that e-commerce business operators have an obligation to report their data to various agencies, such as the Central Statistics Agency, the Central Bank, and the IT Ministry. The minister also promised to conduct an in-depth study of the digital economy in order to create a level playing field for e-commerce taxes, especially between the marketplace and social media.

Untung said he is optimistic that with the alterations, the new tax regulation will be accepted more easily by platform operators and micro businesses, as it won’t affect their earnings and operations that much.

“The five points of agreement are the result of the discussion between the ministry and the association,” he concluded. “To us, this is a win-win solution for all parties although there are still some implementation details that need to be further reviewed.”

Editor: Nadine Freischlad & Brady Ng