Indonesia’s move to levy a 10% VAT on tech companies operating within its jurisdiction would provide a boom for the government’s revenue collection in 2021 as its digital economy continues to grow at a rapid pace.
According to tax experts and analysts, the additonal revenue collected from the VAT on tech companies could exceed Rp 10 trillion (S$1 billion) a year, a welcome boost for the government as it faces looming budget deficit on the back of a fast slowing economy.
The game changer has been the acceleration of online transactions of both goods and services driven by the Covid-19 pandemic. Randy Jusuf, managing director of Google Indonesia told the Business Times that Indonesia’s digital economy is predicted to expand from US$40 billion in 2019 to US$130 billion in GMV (gross merchandise value) by 2025.
“While the drivers of the digital economy are changing due to the pandemic, we believe the growth will continue. There is massive growth coming from non-Metro areas, which are growing at an even faster rate than in big cities. Changes in consumer spending and behaviour brought about by the pandemic have accelerated the move to online and we think the country is laying the groundwork for more homegrown talent to become regional champions in e-commerce, ride hailing and online food delivery,” he noted.
Bawono Kristiaji, tax consultant with Danny Darussalam Tax Center (DDTC), said that the fast growing digital transactions offer a huge opportunity for the government to boost VAT income but with a caveat; all the appointed companies must strictly implement the regulation and show high compliance. In the past, the government chose a voluntary approach, expecting individuals and corporations to self assess and pay VAT for online transactions.
“That approach did not work out so now the government is enforcing tech companies to collect VAT on behalf of the governent,” he added. “The revenue potential from VAT will run into trillions of rupiah but again much depends on compliance and willingness of the appointed companies in collecting the tax.”
This view was echoed by Ay Thjing Phan, market leader and tax partner at PWC Indonesia. She noted that the challenge will be to collect VAT from individuals who are not registered as tax payers, rather than corporations.
“Indonesia is doing the right thing in imposing VAT on digital transactions,” she said. “The issue is the mechanism in asking foreign tech companies to collect the VAT on the behalf of the government.”
To date the government has appointed 28 tech companies to collect VAT, both domestic and foreign and expects to generate its first payment at the end of September, said Hestu Yoga Saksama, director of counseling services and public relations at the Directorate General of Taxes .
Companies such as Google Indonesia and Shopee International Indonesia have already began to apply the 10% VAT on all its online services to comply with the new government regulations. Both companies noted that the additional VAT will not have an impact on their business and revenues.
“I don’t think the VAT will have an impact on the growth of the digital economy,” said Randy Jusuf from Google Indonesia. “To be in compliance with Indonesia’s new VAT legislation, where applicable, we started charging a 10% Services Tax to our clients in the country once the law came into effect. We were the first company to collect VAT in Indonesia once the new law was implemented. As already announced by the Director General of Taxation, all our entities, Google Asia Pacific, Google Ireland and Google LLC are also in compliance.”
Over at Shopee International Indonesia, Radityo Triatmojo, Head of Public Policy and Government Relations, said the company was also in compliance with the latest government regulations. “We want to make it clear that the new regulation is not an e-commerce VAT. Instead, the VAT is levied on intangible digital goods and services from foreign countries and as such it will not affect the price of goods sold on our platform.”
“As long as the regulation supports the development and growth of SMEs in Indonesia, we will always support it. Currently we are still waiting official socialization from MoF (Ministry of Finance) or Tax Directorate General on this new appointment,” he added.
As of September 2020, there are 22 countries around the world that have passed or implemented direct tax on the digital economy players with another 16 countries that have either announced the intention to implement or are in the process of drafting legislation.
In addition to the 10% VAT on online goods and services, the Government of Indonesia is also working to collect income tax from its appointed partners.
“Indonesia is very active in discussions with the OECD (Organization for Economic Co-operation and Development) to impose an Electronic Consumption Tax but those discussions are currently deadlocked,” said PWC’s Ay Thjing Phan. “Indonesia’s position is to honor the global consensus on the issue but that is so far not within sight.”
As an alternative, the Ministry of Finance is working on a draft regulation to be included within the Taxation Bill that imposes tax based on Significant Economic Presence rather than taxing tech companies based on the permanent establishment regime, said Hestu Yoga Saksama. The details have not been flushed out yet but the intention to boost tax revenues from global tech players is crystal clear.