Regardless of being a domestic or foreign enterprise, companies established in Indonesia must determine whether to operate as a taxable or non-taxable business entity concerning Value Added Tax (VAT).

If the company’s annual revenue exceeds IDR 4.8 billion (approximately USD 286,000*), it is automatically classified as a taxable business entity. However, companies with revenue below this threshold may still choose to register as taxable entities. Therefore, it is essential to evaluate which classification best suits your business.

This article outlines the characteristics, advantages, and disadvantages of taxable and non-taxable entities in Indonesia. If you are considering establishing a company in Indonesia, this information may be useful.

*Exchange rate used: 1 IDR = 0.0000596 USD

About Value Added Tax (VAT)

VAT is a tax levied in Indonesia’s customs area on the delivery of taxable goods and provision of taxable services. Taxable entities are responsible for collecting and remitting VAT.

It can be understood as similar to Japan’s consumption tax. For further details, please refer to the related article.

Advantages and Disadvantages of Taxable Entities

Taxable entities are those engaged in the sale of goods or provision of services within Indonesia and have an annual revenue of at least IDR 4.8 billion (approx. USD 286,000).

Such companies or individuals must register with the tax office as Taxable Entrepreneurs (Pengusaha Kena Pajak, PKP) and are obligated to collect and pay VAT. Businesses with revenue under IDR 4.8 billion can also register as taxable entities by applying.

Invoices issued by taxable entities must include VAT, which customers are required to pay in addition to service fees.

Example: When Company A (a VAT-registered entity) engages in a transaction with a customer within the month.

If the invoicing party, such as Company D, is located outside Indonesia, the buyer must remit VAT to the tax office, regardless of whether they are a taxable or non-taxable entity.

If Company D, a Japanese corporation, has its residency certificate registered with the Indonesian tax office, Company A only needs to remit VAT. If not, both VAT and PPh26 (withholding tax for foreign transactions) are payable. See the related article on tax treaty application for international remittances.

Advantages of Being a Taxable Entity

• Input VAT paid domestically or internationally can be offset against output VAT collected

For companies with many transactions involving taxable entities, more input VAT can be offset, thereby reducing the amount payable to the tax office. Similarly, VAT incurred in international remittances can also be offset, benefiting companies that frequently send money abroad.

Example: Calculation of VAT payable by Company A to the tax office in the following month:

VAT paid by Company A (IDR 500,000 + IDR 800,000) − VAT collected by Company A (IDR 300,000)
= IDR 1,000,000 (approx. USD 59.6)

This illustrates that the treatment of VAT resembles Japan’s consumption tax system.

Disadvantages of Being a Taxable Entity

• Monthly VAT filing and payment are required
• Invoices appear higher due to VAT inclusion

Becoming a taxable entity requires monthly VAT reporting and payment. Late submissions or payments incur penalties, necessitating timely compliance.

Moreover, for clients who are non-taxable entities, invoices may seem expensive due to the added VAT. If your client base includes many non-taxable entities, the apparent price increase could affect customer perception and reduce offset opportunities. It is advisable to understand the business classifications of your clients.

Advantages and Disadvantages of Non-Taxable Entities

Most non-taxable entities are businesses or sole proprietors with annual revenue below IDR 4.8 billion (approx. USD 286,000). They are not required to collect VAT, and unless they engage in international remittances, are not obligated to remit VAT.

Example: When Company A (a non-taxable entity) engages in a transaction within the month.

Advantages of Being a Non-Taxable Entity

• Invoices appear cheaper as VAT is not included

Regardless of whether clients are taxable or non-taxable, not charging VAT can reduce tax burdens, protect assets, and promote transaction success and continuity.

Disadvantages of Being a Non-Taxable Entity

• Cannot offset paid VAT as VAT is not collected

This becomes a significant disadvantage when transacting with many taxable entities, as VAT paid on purchases cannot be recovered.

Example: Calculation of VAT actually paid by Company A:

VAT paid by Company A (IDR 500,000 + IDR 800,000)
= IDR 1,300,000 (approx. USD 77.5)

Of this amount, IDR 800,000 (from international remittances) must be paid by Company A, and IDR 500,000 is paid by Company C, the taxable entity.

Frequent transactions with taxable entities increase unrecoverable VAT, making this a major drawback.

Procedures for Registering as a Taxable Entity

To register as a taxable entity, necessary documents must be prepared and submitted to the tax office. If the process proceeds smoothly, the registration can be completed in about one month. Required information and steps are as follows:

Required Information

• Company owner’s information
• Email addresses and phone numbers of directors and auditors
• Family registry documents of directors and auditors
• Office information
• Taxpayer Identification Number (NPWP)
• Lease agreement (Surat perjanjian sewa menyewa)
• Business registration/license number (NIB/SIUP)

Submission Method

Documents can be submitted by mail or in person at the tax office. As mailing may take longer than expected, in-person submission is recommended. Online applications are not available.

Application Process

1. Submit the required documents to the tax office (a representative may apply)
2. Tax office visits the office for an interview regarding company information (can be handled by an employee other than the director)
3. Receive a notification of appointment as a taxable entity from the tax office
4. Activate an account for the taxable entity service “e-Nofa Online”
5. Download the “Aplikasi e-Faktur” app used to generate VAT invoices and obtain an electronic certificate*

If you have any questions or concerns after reading this article, please ask them below.
We will respond within a couple of days.

Conclusion

Taxable and non-taxable entities each have unique advantages and disadvantages, and businesses must operate by leveraging their respective traits. Taxable entities can offset applicable VAT, but their administrative responsibilities are more complex.

Conversely, non-taxable entities avoid this complexity but cannot recover VAT paid. Therefore, each business should select the classification that best aligns with their business model and objectives, and manage operations accordingly.