O

nline merchants in Indonesia range from students and housewives to more sophisticated mid-size shop owners with a team of employees. For a long time, they have dealt with issues regarding tax collection and
reporting.

The first issue is that merchants often do not declare their incomes. Most merchants, especially micro, small and medium enterprises (MSMEs), do not declare nor pay the tax they are due, not only because it is bothersome, complicated and negatively affects sales, but because many merchants are not even aware of their tax obligations.

In order to address this issue, the government issued Government Regulation No. 23/2018, which lowers the final income tax to 0.5 percent from 1 percent for companies or individuals with a total turnover of below Rp 4.8 billion (about US$344,517) and give a transition period of as long as seven years before imposing normal rates (for individual taxpayers). The regulation aims to raise awareness to MSMEs that tax obligations go hand-in-hand with running a business.

The second issue is value added tax (VAT). Merchants with an annual sales turnover of above Rp 4.8 billion have to register themselves as taxable enterprises (PKP). They may also voluntarily request to be affirmed as a PKP although their sales do not reach Rp 4.8 billion. A PKP merchant must typically charge VAT at a rate of 10 percent to buyers.

Merchants who sell via online platforms are able to slip under the radar of the Indonesian tax authority and sell goods without collecting VAT. For most people, if you go to the store and purchase a chair, table or television, you will pay VAT.

The price difference that an online marketplace offers since their system does not check whether PKP merchants are collecting VAT or not, is reason enough for shoppers to switch to them.

Marketplace operators, as companies, are seen to be supporting this system. Since taxes are not added by the merchants, the price is lower on their platform compared to physical stores. The operators take no responsibility for what its merchants do. This practice is not entirely wrong; it is not the marketplace operators’ job to collect merchants’ taxes.

Equity between online and brick-and-mortar merchants is important. For this purpose, the Finance Ministry issued Ministerial Regulation No. 210/2018, which does not introduce new taxes or a new tax increase but only a measure to allow the government to collect taxes that are currently owed them but are being avoided by the merchants.

Article 7 of the regulation stipulates that all payments received by marketplace operators from merchants’ trading activities shall include VAT. This article is written under the chapter “Tax treatment for marketplace operators”.

Regulation 210/2018 puts the onus on the operators to figure out how to ensuring VAT is collected on sales on their platform.

The third issue is that the Indonesian tax authority has difficulties monitoring transactions of the nation’s MSME businesses, including merchants of online marketplaces.

Regulation 210/2018 forces e-commerce operator to require merchants to provide a taxpayer number (NPWP) or citizen identity number (KTP). Furthermore, the operator has the obligation to report the recapitulation of trade transactions conducted by the merchants to the tax authority. The wording in the regulation suggests that operators must share key details about sellers using their platforms, such as their name, address and tax number — basically, all registration information.

This system is not without flaws. Merchants could give invalid NPWP or KTP numbers as well as share or clone numbers belonging to other businesses (i.e. tax/VAT fraud).

The regulation does not stipulate the legal consequences for operators who continue to allow merchants on their marketplaces without providing the required background information, including their NPWP or KTP numbers.

Should the operators block the non-compliant merchants’ account or freeze their funds? Should marketplace operators be held accountable for lost funds if sellers still do not pay their taxes? There is no clear provision on these matters.

From the perspective of the marketplace operators, they are afraid that the merchants will move their businesses to a social network like Facebook. Merchants can create “online stores” on social networking sites and start placing cheap non-VAT offers there. This will appeal to most prospective buyers.

Finance Ministerial Regulation No. 210/2018 stipulates that all relevant tax laws also apply to social media. Nevertheless, we understand it is hard to enforce the law to companies that do not officially do business in Indonesia.

Merchants are now worried that the new regulation would enable the tax authority to collect back taxes. An investigation from a tax investigator may lead to a hefty bill for uncollected back taxes, which could also come with penalties and interest.

There is no mention of amnesty for merchants of online marketplaces that would wipe out their back taxes if they started to tax future sales under Regulation 210/2018.

Is Regulation 210/2018 bad for merchants? Yes and no. It is safe to expect to decline in sales. Low-income shoppers may reduce their spending at online marketplaces. It seems fairly logical that a shopper might also give more consideration to taxes on a large purchase.

Nonetheless, for years many e-commerce merchants did not realize that they already had tax obligations every time they made a sale. The services that will be provided by the marketplace operators, while not really providing sellers with an advantage in the market, will at least enable them to comply with the requirements of the law.

How could Regulation 210/2018 impact e-commerce operators? The 10 percent tax may drive buyers from such marketplaces to social media. However, shopping in online marketplaces is more about convenience and selection of goods.

What these marketplace really excel at these days is having the greatest selection of goods available and getting them to consumers in the shortest amount of time. Further, they always provide a secure payment mechanism.

Regulation 210/2018 is scheduled to take effect on April 1. It will likely take more time before many marketplace operators figure out how to collect merchants’ background and transaction data. Many have complained about the tight timeline.

There are few numbers of technicalities in this regulation that need to be discussed between online marketplace operators and the tax authority. While technology may have progressed, it will still be a substantial burden for e-commerce operators to comply with the new tax policies.