Value Added Tax (VAT), known as PPn in Indonesian, is a type of indirect tax levied on the purchase of goods and services. It is imposed at the point where value is added during the production or sales process, hence the name. Currently, approximately 175 countries adopt VAT systems, with tax rates and taxable goods and services differing by country.

This article introduces the structure and payment process of VAT in Indonesia.

How VAT Works

VAT is imposed on the added value of goods or services at various stages of production and distribution.

For example, imagine a product passing from a manufacturer to a wholesaler, then a retailer, and finally to the consumer. At each stage, the taxable entity (manufacturer, wholesaler, retailer) pays VAT to the tax office based on the value added at their respective stage.

A key feature of VAT is that the tax burden is ultimately borne by the consumer. Receipts issued by taxable entities must clearly state “VAT (11%)” or “VAT included.” If not stated, it means the seller is not a VAT-registered entity.

VAT Rates

Indonesia’s VAT rates are categorized as follows:

• 11% – Domestic transactions
• 0% – Export transactions

According to JETRO, the standard VAT rate for domestic transactions is scheduled to increase to 12% starting January 1, 2025. Since tax rates may change due to government policies or legislation, it is advisable to consult Indonesia’s tax office or official sources for the latest rates.

Reference: Tax System｜Indonesia

Taxable Goods and Services

Goods and services subject to the 11% rate include:

• Delivery of taxable goods within Indonesia’s customs territory by companies
• Importation of taxable goods
• Provision of taxable services within the customs territory
• Use or consumption within the customs territory of intangible taxable goods created abroad
• Use or consumption within the customs territory of taxable services provided abroad

Goods and services subject to the 0% rate (only applicable to VAT-registered entities) include:

• Export of taxable tangible and intangible goods by VAT-registered entities
• Export of taxable services by VAT-registered entities

Exempt Goods and Services

Exempt goods and services include:

• Essential foodstuffs: rice, meat, eggs, milk, fruits, vegetables, sugar, salt, etc.
• Minerals (crude oil, natural gas, iron ore, etc.)
• Food and beverages served in restaurants and hotels
• Medical, educational, social, insurance, financial, public transportation, and labor services
• Vaccines, textbooks, religious scriptures
• Tap water (including installation and fixed fees)
• Electricity (excluding households with usage over 6,600VA)
• Banknotes, gold for government foreign reserves, and securities

Exempt Imports

Exempt imported items include:

• Vaccines, textbooks, religious scriptures
• Factory machinery and equipment
• Fishery and livestock products, seeds, seedlings, animal feed and raw materials
• Electricity, tap water, weapons, ammunition
• Vehicles for the Indonesian Armed Forces and National Police
• Boats, trains, fishing vessels, aircraft
• Products for the disabled
• Research-related equipment
• Relocation goods and checked baggage

VAT-Registered Entities

VAT-registered entities are businesses or individuals conducting sales or services domestically with annual revenue of at least IDR 4.8 billion (approx. USD 286,000*). These entities must register as Pengusaha Kena Pajak (PKP) with the tax office and are obligated to collect and remit VAT.

The benefit of being VAT-registered is the ability to offset input VAT paid against output VAT collected, similar to Japan’s consumption tax system.

In contrast, non-VAT-registered entities are not required to remit VAT and cannot collect it. Therefore, if they conduct many transactions with VAT-registered entities, they may pay considerable VAT but cannot offset it. Still, even businesses with revenue under IDR 4.8 billion can choose to register as VAT-registered entities, depending on their circumstances.

VAT Payment and Reporting

Process from Collection to Remittance

Indonesia uses the invoice method for VAT collection. This method calculates and collects VAT based on issued invoices, not just sales revenue. Here’s how it works:

• Issuance of Invoices:
  VAT-registered entities issue invoices and tax documents (Faktur Pajak) for goods or services provided. The invoices specify the price (exclusive of tax) and VAT amount.
• VAT Calculation:
  VAT is calculated by applying the tax rate to the tax-exclusive amount stated on the invoice.
• Collection and Remittance:
  Customers pay the total amount (price + VAT). The VAT-registered entity remits the collected VAT and submits a VAT return and Faktur Pajak to the tax office.
• Tax Deduction:
  VAT-registered entities may deduct the VAT they paid on purchases from the VAT they collected from customers. This determines the amount payable to the tax office.

Under this system, VAT is only levied on the value added by the VAT-registered entity.

Example: When Wholesaler B is a VAT-registered entity.

Filing and Payment Deadlines

• Filing Deadline: End of the following month
• Payment Deadline: Before submitting the VAT return

Late payment penalties apply. Even a one-day delay is considered a full-month delay, incurring one month’s penalty. Penalties can accumulate up to 24 months.

Penalty Calculation:

Penalty = Interest rate × Number of delayed months × VAT amount payable

Additional penalty for late VAT return filing:

• Late VAT filing: IDR 500,000 (approx. USD 30)

VAT Refunds

VAT-registered entities can apply for VAT refunds at the end of the fiscal year. The Directorate General of Taxes (DGT) conducts a tax audit and must decide on the application within 12 months. If no decision is made within that period, the refund is deemed approved by law.

Supporting documents must be submitted to the DGT within one month of application. Documents submitted after the deadline will not be considered in the refund calculation.

Conclusion

Indonesia’s VAT system plays a crucial role in funding public services and infrastructure. For businesses operating in Indonesia, understanding VAT is essential, especially when deciding whether to register as a VAT-registered entity.

As VAT applies to a wide range of goods and services, it is advisable to consult the Indonesian tax office’s official website or seek advice from tax professionals for detailed information and recent tax law updates.

*Exchange rate used: 1 IDR = 0.0000596 USD