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Imposing VAT on digital economy is never easy
At least, there are two challenges for the enactment of this regulation. First, how do we get PPMSEs abroad to comply with domestic VAT regulations?
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In Indonesia, the most visited websites by average monthly traffic according to SimilarWeb are Google, YouTube and Facebook. (Shutterstock/mirtmirt)
T
he Implementation of Finance Ministerial Regulation (PMK) No. 48/2020 concerning procedures for collection, deposits and the appointment of collectors, as well as reporting value added tax on the utilization of intangible taxable goods and/or taxable services from outside the customs area through electronic trading, could indeed become a breakthrough step to broaden the country’s tax base while capturing what has so far eluded: value-added tax on digital products.
However, the regulation, which will take effect on July 1, may not necessarily solve the problem. Furthermore, it raises questions about how the government’s good intention can actually be applied, considering that the nature of digital products is intangible and, therefore, difficult to monitor.
The mandate to start taxing digital products is stipulated in Regulation in Lieu of Law (Perppu) No. 1/2020, which was enacted recently. According to the Perppu, the taxes applied to digital products consist of two types: income tax and value added tax (VAT).
VAT is levied on the utilization of intangible taxable goods and/or taxable services from outside the customs area by using trade through electronic systems (PMSE), while the imposition of income tax is carried out on electronic transactions of PMSEs conducted by foreign tax subjects that meet the provisions of significant economic presence.
The government seemed intent on first targeting the consumption of various digital products, such as streaming music subscriptions, streaming movies, software and games, as well as online services from abroad. Considering its characteristics as a consumption tax, the VAT burden, which will be borne entirely by consumers of digital goods and services, becomes a disincentive to people's purchasing power as consumers. Still, the VAT collection procedure by digital product providers also has many challenges.
The government is also trying to form an equal playing field between global and domestic digital product providers. The imposition of VAT means that the price offered to consumers will be fairer because the VAT component is included in the price. Presently, only domestic digital product manufacturers are obliged to collect VAT in accordance with the provisions of Law No. 42/2009, while over-the-top foreign digital product providers can freely stream their products to domestic customers without collecting VAT.
A quite subtle difference between Law No. 42/2009 and PMK No. 48/2020 is the way to entrust the provider of foreign trade through electronic systems (PPMSE) as a VAT collector. In the VAT Law, VAT collectors in general are taxable entrepreneurs (PKP), who deliver taxable goods or services within the customs area.
