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Caveats for value-added tax on digital products
Despite a very positive impact on the economy in Indonesia, the new regulation on VAT for digital products will not be effective without comprehensive efforts to improve information technology in the Directorate General of Taxes (DGT) and cooperation with other countries.
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Illustration of online shopping (Shutterstock/Stanisic Vladimir)
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igital products in Indonesia will be subject to tax as of July 1 of this year. Utilization of digital products in the form of intangible goods and services by domestic consumers is subject to a value-added tax (VAT) of 10 percent. Overseas businesses selling digital products to Indonesian customers in excess of an established threshold or whose traffic surpasses an established limit must register as VAT collectors with the Directorate General of Taxes under the Finance Ministry. Such businesses will have to charge a 10 percent VAT on their sales of digital goods to customers in Indonesia.
These provisions are regulated in Finance Ministry Regulation No. 48/2020, which reflects the government’s seriousness in following up on the Organization for Economic Cooperation and Development’s (OECD) Secretary General Tax Report to the Group of 20 Finance Ministers and Central Bank Governors. The first steps of the digital tax measures have been accommodated in the new law on COVID-19 pandemic response.
Digital transactions in Indonesia have undeniably increased. The e-Conomy SEA 2019 report reveals that the average digital economic growth rate has been between 20 and 30 percent since 2015. In fact, Indonesia and Vietnam have the largest digital economic valuations in the report. The value of the digital economy in Indonesia is estimated to reach US$ 21 billion in 2020 and $82 billion by 2025.
The above report was released by Google and Temasek in 2019, well before the pandemic and its impacts arrived. Bank Indonesia data shows that e-commerce transactions have increased by 18.1 percent to 98.3 million transactions during the pandemic. Meanwhile, the number Quick Response Indonesia Standard transactions at merchants rose to 2.2 million in March 2020 with a total value of Rp 75.1 billion, or an average of Rp 34,177 per transaction.
In contrast, many more traditional, physical businesses have been disrupted. The Communications and Information Ministry has stated there are only 6.4 million small and medium enterprises using online systems, while Indonesia’s active internet users have reached 132 million.
Therefore, physically based businesses in Indonesia could be further eroded by the presence of digital products from abroad, especially as goods and services in Indonesia will be subject to a 10 percent VAT, leading to higher prices. Before this regulation was enacted, Indonesia had not been able to impose taxes on digital products. On the other hand, revenue from the digital economy was estimated to have reached $40 billion by 2019. Hence, the imposition of a 10 percent VAT on digital products will hopefully create a more level playing field for Indonesian companies in the business.
Despite a very positive impact on the economy in Indonesia, the new regulation on VAT for digital products will not be effective without comprehensive efforts to improve information technology in the Directorate General of Taxes (DGT) and cooperation with other countries.
