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Understanding the Tax System: A Guide for Businesses in Indonesia

Indonesia is one of Southeast Asia’s largest and most dynamic economies, and its tax system plays a critical role in supporting the country’s economic development. Whether you are a local entrepreneur or a foreign investor, understanding Indonesia’s tax system is essential for operating a compliant and successful business.

In this article, we will provide you with a comprehensive guide to Indonesia’s tax system, highlighting the key taxes that businesses must pay, how to stay compliant, and the best practices for managing your tax obligations.

1.Overview of the Indonesian Tax System

Indonesia’s tax system is regulated by the Directorate General of Taxes (DGT), under the Ministry of Finance. The system is designed to ensure that businesses contribute to the country’s development while also providing the government with the necessary resources to maintain public services and infrastructure.

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The Indonesian tax system includes various taxes that businesses need to comply with, ranging from income taxes to value-added taxes (VAT) and social security contributions.

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2.Key Taxes for Businesses in Indonesia

As a business owner in Indonesia, there are several key taxes that you will need to pay. Below are the primary taxes businesses are responsible for:

a)Corporate Income Tax (PPh Badan)

The Corporate Income Tax (PPh Badan) is one of the most important taxes for businesses in Indonesia. It is charged on the net income (profit) of companies operating in Indonesia.

• Tax Rate: The corporate tax rate in Indonesia is currently 22% as of 2025.
• Who needs to pay: All businesses, whether local or foreign (with a PT PMA structure), must pay corporate income tax on their profits.

What you need to know:

• Businesses must file their corporate income tax returns annually, reporting all income and expenses, and paying the tax due.
• Taxable income is calculated after deducting allowable business expenses from the revenue generated during the year, including salaries, operating costs, and other business-related expenses.

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b)Value Added Tax (PPN)

Indonesia imposes a Value Added Tax (Pajak Pertambahan Nilai – PPN) on the sale of goods and services. The VAT system is designed to ensure that tax is collected at each stage of the production or distribution process.

• Tax Rate: The standard VAT rate in Indonesia is 10%.
• Who needs to pay: VAT is applied to the sale of goods and services by businesses that are registered for VAT, including real estate developers, retailers, and service providers.

What you need to know:

• Businesses that sell goods or services subject to VAT must charge VAT to their customers and then remit it to the tax authorities.
• VAT Exemptions: Certain goods and services, such as basic food items and specific medical products, may be exempt from VAT.

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c)Income Tax on Employees (PPh 21)

PPh 21 is the income tax on employees, which businesses are responsible for withholding and paying to the tax authorities. This tax is applicable to any business with employees in Indonesia.

• Tax Rate: The rate depends on the employee’s income and can range from 5% to 30%.
• Who needs to pay: Employers are required to withhold PPh 21 from their employees’ salaries and submit it to the tax office monthly.

What you need to know:

• Employers must report and remit the employee tax on a monthly basis.
• Businesses are responsible for providing employee tax statements (Bukti Potong) that show how much tax has been withheld.

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d)Withholding Tax (PPh 23)

PPh 23 is a tax that businesses must withhold on certain payments to third parties, such as interest, royalties, and service fees. The tax is withheld from the payment and remitted to the government.

• Tax Rate: The rate varies depending on the type of payment but typically is 2% for services and 15% for interest and royalties.
• Who needs to pay: Businesses that make payments to third parties (contractors, consultants, etc.) for certain services must withhold and remit this tax.

What you need to know:

• Businesses must ensure that they have the correct documentation to prove that the tax was paid.
• This tax is generally paid monthly, and businesses must file it with their SPT Masa PPh 23.

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e)Social Security Contributions (BPJS Ketenagakerjaan and BPJS Kesehatan)

Employers in Indonesia are required to contribute to the BPJS Ketenagakerjaan (employment security) and BPJS Kesehatan (healthcare) for their employees. These contributions ensure employees are covered under Indonesia’s social security programs.

• BPJS Ketenagakerjaan: Covers work-related accidents, pensions, and death benefits. The employer and employee both contribute.
• BPJS Kesehatan: Covers general healthcare services. Employers are required to pay a portion of the contributions for their employees.

What you need to know:

• Employers must deduct the employee’s contribution from their salary and pay both the employee’s and employer’s portions to the relevant authorities.
• These contributions are required for all employees, and businesses must ensure they comply to avoid penalties.

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3.Tax Reporting and Filing Requirements

Business owners in Indonesia are required to file their taxes regularly and accurately. Here’s an overview of the reporting requirements:

• Monthly Tax Returns: Most businesses must file monthly tax returns, including VAT, income tax on employees (PPh 21), and withholding tax (PPh 23).
• Annual Tax Return: Companies must file an annual corporate tax return (SPT PPh Badan) to report their income, expenses, and tax payments.
• Tax Payment Deadlines: Taxes must be paid on time to avoid penalties. Monthly taxes are typically due by the 10th day of the following month.

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4. Common Tax Issues Businesses Face in Indonesia

• Late Tax Payments: Late payments can result in penalties and interest charges.
• Incorrect Withholding Tax: Failure to withhold the correct amount of tax from employees or third parties can lead to fines.
• Failure to Register for VAT: Businesses that meet the threshold for VAT registration must register or face penalties.

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Conclusion

Understanding Indonesia’s tax system is essential for businesses to remain compliant and avoid unnecessary fines or penalties. With the right guidance, businesses can manage their tax obligations effectively, reduce risks, and focus on growth. At Selaras Group, we are here to provide you with the expertise and support you need to navigate the complex tax environment in Indonesia.

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