In 2020, the government has carried out economic reforms by making a harmonization of laws from various fields into one comprehensive regulation in the Job Creation Law no. 11 of 2020 with the spirit to open up new opportunities for investment that can increase employment and increase Indonesia's economic growth. In line with that, to help Indonesia's resilience in the economy, the government has ratified a comprehensive regulation in the field of taxation on 29 October 2021, namely Law No. 7 of 2021 concerning Harmonization of Tax Regulations (“Law No. 7/21”). Furthermore, the Law No. 7/21 also aims to be able to play a role in the following matters:

1. promote sustainable economic growth and support the acceleration of economic recovery;
2. optimize state revenues to finance national development independently;
3. realizing a tax system that is more just and with legal certainty;
4. implement administrative reforms, consolidated taxation policies, and expand the tax base; and
5. improve voluntary compliance of taxpayers.

Changes in Taxation Policy as Regulated in Law No. 7/21

Following in the footsteps of the Job Creation Law which was formed using the Omnibus Law method, the Law No. 7/21 was formed using the same method, so that it will change several regulations governing the following provisions:

A. Amendment to Law No. 16 of 2009 concerning Stipulation of Government Regulation in Lieu of Law No. 5 of 2008 concerning Fourth Amendment to Law No. 6 of 1983 concerning General Provisions and Tax Procedures

Some of the important changes that can be highlighted regarding general provisions and tax procedures after the Law No. 7/21 are as follows:

1. The application of the Identification Number (Nomor Induk Kependudukan or “NIK”) to become the Taxpayer Identification Number (Nomor Pokok Wajib Pajak or“NPWP”) for Individual Taxpayers with due regard to the subjective and objective conditions;
2. There is a decrease in the amount of sanctions for the following violations:

Furthermore, related to General Provisions and Tax Procedures, Law No. 7/21 regulates the reduction of sanctions related to applications for tax objections or appeals, the establishment of a mutual agreement procedure to prevent or resolve problems that arise in the application of the double taxation avoidance agreement, and the enforcement of tax criminal law by prioritizing providing opportunities for taxpayers to recover losses on state income.

 B. Amendment to Law No. 36 of 2008 concerning Fourth Amendment to Law No. 7 of 1983 concerning Income Tax (“Law No. 7/83”)

In Article 2 paragraph 3 Law No. 7/21, the minimum amount of Non-Taxable Income per year has been changed, the difference can be seen in the following table:

Furthermore, Law No. 7/21 also changes the rate of Taxable Income of domestic individual and corporate taxpayers, as listed in tables B.1 and B.2 below:

C. Amendment to Law No. 42 of 2009 concerning the Third Amendment to Law No. 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods (“Law No. 8/83”)

In Article 4 paragraph 2 of Law No. 7/21, the Government has set an increase in Value Added Tax (“VAT”) rates for goods and services with the following scheme:

1. An increase in the VAT rate from 10% to 11% which comes into effect on 1 April 2022; and
2. Then to 12% which will take effect no later than 1 January 2025.

Although, the VAT rate above still can be changed to a minimum of 5% and a maximum of 15% where the change will require stipulation through the issuance of a Government Regulation that has first been submitted by the Government to the DPR for discussion and has been agreed upon during the preparation of the Draft State Revenue and Expenditure Budget (Anggaran Pendapatan Belanja Negara or “APBN”).

However, to protect small and medium-sized society from price increases due to changes in VAT, Article 4 Law no. 7/21 regulates the abolition and exemption of VAT on the following goods and services:

While partiality to Entrepreneurs is shown by Law No. 7/21 by stipulating that Input Tax on the acquisition of Taxable Goods and/or Taxable Services, import of Taxable Goods, as well as utilization of Intangible Taxable Goods and/or utilization of Taxable Services from outside the Customs Area within the Customs Area, which in calculating the VAT payable uses the basis for the imposition of taxes in the form of other values may be credited.

Further, this provision applies to the input tax has been paid on the acquisition of Taxable Goods and/or Taxable Services, import of Taxable Goods, and utilization of Intangible Taxable Goods from outside the Customs Area within the Customs Area and/or utilization of Taxable Services from outside the Customs Area within the Customs Area Customs whose delivery is not subject to VAT.

D. Regulations Regarding the Taxpayer Voluntary Disclosure Program

To encourage taxpayers to voluntarily comply with their tax obligations and to increase state revenues from the taxation sector to support the target of revitalizing the state budget with a maximum deficit of 3% in 2023, the Government regulates the Voluntary Disclosure program which will be implemented during the period from 1 January 2022 to 30 June 2022, with the following conditions:

E. Regulation on Carbon Tax

Under the Law No. 7/21, a carbon tax is imposed on carbon emissions that have a negative impact on the environment by taking into account the he carbon-tax roadmap and/or the carbon-market roadmap. As for the provisions regarding the imposition of a carbon tax, it is regulated as follows:

F. Amendment to Law Number 39 of 2007 concerning Amendments to Law Number 11 of 1995 concerning Excise

The Law No. 7/21 provides confirmation and addition of types of excisable goods resulting from tobacco in the form of electronic cigarettes, thus, Excisable Goods consisting of:

1. ethyl alcohol or ethanol, regardless of the materials used and the manufacturing process;
2. drinks containing ethyl alcohol in any amount, regardless of the ingredients used and the manufacturing process, including concentrates containing ethyl alcohol; and
3. tobacco products, which include cigarettes, cigars, leaf cigarettes, sliced tobacco, electric cigarettes, and other tobacco processing products, regardless of whether or not substitute or auxiliary materials are used in their manufacture.

In addition to changing the procedure for adding and/or subtracting the types of Excisable Goods, Law no. 7/21 also regulates the enforcement of criminal excise law by prioritizing the recovery of losses on state revenues.

Provisions Applicability

The provisions above apply since Law no. 7/21 promulgated, except for the following provisions:

1. Provisions related to income tax shall come into effect in the 2022 Fiscal Year;
2. Provisions related to VAT and Sales Tax on Luxury Goods shall come into effect on 1 April 2022; and
3. Provisions related to the Carbon Tax shall come into force on 1 April 2022, which will be imposed for the first time on entities operating in the field of coal-fired power plants at a rate of Rp.30 (thirty rupiahs) per kilogram of carbon dioxide equivalent (COze) or units equivalent.

Conclusion:

With the establishment of Law no. 7/21 is expected to maintain economic stability, especially to solidly support economic recovery and growth after the Covid-19 pandemic since 2020 which has weakened the Indonesian economy, through the expansion of the tax base that can optimize tax revenues. Optimization will also be realized through re-arrangement of individual and corporate income tax rates, the appointment of other parties to withhold, collect, deposit, and/or report taxes; re-arrangement of VAT facilities, increasing VAT rates while taking into account the interests of small and medium-sized groups as well as Small and Medium Enterprises; implementation of carbon tax; as well as changes in the mechanism for adding or subtracting types of Excisable Goods.

Should there be any queries related to this regulation or to find out if this affects your business or personal interest, please do not hesitate to contact us.