Value Added Tax (VAT)

Value-added tax (VAT), or Goods and Services Tax (GST) in some countries, is an incremental indirect tax levied at each stage of a product or service’s lifecycle — from production and distribution to sale. It operates on a destination-based model, where the tax rate hinges on the consumer’s location and is applied to the sale price. However, the entity that ultimately shoulders the tax burden may not be the one that remits it to the tax authorities.

 

VAT Rates and Applicability in Indonesia

VAT in Indonesia is primarily imposed on the provision of services and the transfer of taxable goods. The standard VAT rate is 11%, applicable to most manufacturers, retailers, wholesalers, and importers since April 2022. This rate is set to increase to 12% by 2025. However, certain transactions, such as the export of tangible and intangible goods and services, are subject to a zero per cent VAT rate.

Taxable Goods and Services

Taxable goods and services encompass various activities, including importing taxable goods, delivering taxable services, consuming taxable goods within a customs area, consuming taxable services from outside the customs area, and exporting taxable goods by VAT-registered entities.

Goods and Services Exempt from VAT

The Indonesian government designates specific goods and services as non-taxable, including food and beverages served in restaurants and hotels, natural resources like natural gas and coal, essential commodities such as rice and milk, and certain financial services. These exemptions aim to ensure affordability and accessibility for essential items and services.

VAT Reporting and Compliance

Entities liable for VAT are required to settle their VAT obligations every month. Indonesia’s decentralised VAT regime also mandates that businesses with multiple branches in different tax jurisdictions must register each branch with the relevant tax office.

VAT on Digital Services

Non-resident suppliers of digital services within Indonesia are now designated as VAT collectors and are obligated to collect 11% VAT on behalf of the Indonesian government. This change impacts the utilisation of intangible goods, such as intellectual and industrial property rights, which are now subject to VAT.

VAT Exemptions for Specific Imports

Certain imports may be exempted from VAT, including goods imported into free trade zones, services and goods financed by foreign aid, raw materials imported by companies in bonded zones, and imports by companies in specific industries like national airlines.

VAT Refunds and Zero-Rated VAT on Export Services

VAT refunds are subject to approval by Indonesia’s Directorate General of Taxes (DGT) and require an audit process. Certain exported services are eligible for zero-rated VAT, including toll manufacturing, repair and maintenance, freight forwarding for export-oriented goods, and various consultancy services. Compliance with specific formal requirements is necessary to qualify for zero-rated VAT on export services.

In conclusion, VAT in Indonesia is pivotal in the country’s revenue collection and economic structure. Understanding its intricacies and staying compliant with the regulations is essential for businesses operating within the nation’s borders.