The History of Final Income Tax Regulations in Indonesia

ALONG with the changes to the Income Tax Law (PPh) in Indonesia which have occurred 6 times since 1983 until now, the provisions for final income tax also continue to develop. Changes to regulations regarding final income tax were made to align policies with economic developments and tax administration.

The development of the final PPh arrangement can be divided into 7 periods. The first period begins with the enactment of Law no. 7 of 1983 concerning Income Tax ( Law 7/1983 ). Based on Law 7/1983, the final income tax scheme can generally be found in Article 21, Article 26, and Article 4 paragraph (2).

The final income tax scheme in Article 21 is imposed on everyone who has no other income other than income related to work. The income that has been deducted with PPh is considered as payment for the relevant tax year so that the employee or person is not required to submit an Annual SPT.

In Article 26, the final PPh scheme is applied to the tax withholding scheme for foreign tax subjects (SPLN) on tax objects in the form of interest, dividends, royalties, rent, and so on. Meanwhile, Article 4 paragraph (2) of Law 7/1983 becomes the basis for imposing final income tax for interest on time deposits and other savings. Further provisions regarding taxes on interest on time deposits and other savings are further regulated in government regulations.

In addition to the 3 articles above, the term final income tax can also be found in the explanation of Article 8 paragraph (1). In this context, the wife’s income is considered to have been deducted from the final income tax if the income has been deducted from Article 21 income tax and has no relationship with her husband’s business.

In that period, Article 15 of Law 7/1983 regulates the special calculation norms used to calculate the net income of certain taxpayers which cannot be calculated using the general mechanism regulated in Article 16.

Several years later, the government made changes to Law 7/1983. Thus, the second period was marked by the enactment of Law no. 7 of 1991 concerning the First Amendment to the Income Tax Law ( Law 7/1991 ). The provisions for final income tax as stated in Law 7/1991 have not changed.

However, during this period, the government issued a regulation implementing the provisions of Article 4 paragraph (2). The derivative rules regulate income tax on interest on time deposits, certificates of deposit, savings, and discounts on bank Indonesia certificates (SBI) received or obtained by individual taxpayers (WPOP), corporate taxpayers (corporate taxpayers), and foreign taxpayers ( WPLN).

About 3 years later, the government issued Law no. 10 of 1994 concerning the Second Amendment to the Income Tax Law ( Law 10/1994 ). In the third period, there are at least 7 points of changes to the provisions of the final income tax. First, additional types of income that are subject to final income tax in Indonesia are regulated in Article 4 paragraph (2).

Second, there is a provision regarding the withholding of Article 23 which is final on deposit interest paid by the cooperative. Third, the regulation on the delegation of Article 15 to the minister of finance relates to the application of special calculation norms to calculate the net income of certain taxpayers which cannot be calculated based on Article 16 paragraph (1) or paragraph (3).

Fourth, is the addition of a new type of final PPh object in Article 26. Fifth, the arrangement of the final PPh on asset revaluation as regulated in Article 19. Sixth, the provisions of the final PPh in Article 21 on honorariums received by state officials, civil servants, TNI, and police. Seventh, the imposition of final PPh Article 22 on the sale of certain types of products as regulated in the decision of the minister of finance.

Furthermore, 6 years later, the Income Tax Law was revised with Law no. 17 of 2000 concerning the Third Amendment to the Income Tax Law ( Law 17/2000 ). In the fourth period or the enactment of Law 17/2000, the material content of Article 4 paragraph (2) did not change. However, changes occur in the derivative rules of Article 4 paragraph (2). In the derivative rules, there is an additional object of Income Tax Article 4 paragraph (2) which is final.

Furthermore, the fifth period was marked by the issuance of Law no. 36 of 2008 concerning the Fourth Amendment to Income Tax ( Law 36/2008 ). There are 5 points of changes to the provisions of the final income tax in Law 36/2008. First, the expansion of the types of income subject to final income tax in Article 4 paragraph (2). Second, the object of Article 23 final income tax in the form of interest on deposits paid by cooperatives to cooperative members is changed to the object of Article 4 paragraph (2).

Third, is the expansion of the object of PPh Article 26 which is final in the form of profits from debt relief transactions and the sale or transfer of shares in Indonesia. Fourth, there is a new article, namely Article 17 paragraph (2c) which regulates the taxation of dividends received or earned by WPOP.

Fifth, there is a new PP that regulates the final PPh for micro, small and medium enterprises (MSMEs). The rule in question is PP No. 46 of 2013 stated PP No. 23 of 2018 concerning Income Tax on Income from Business Received or Obtained by Taxpayers with Certain Gross Circulation ( PP 23/2018 ).

The sixth period was marked by the revision of the Income Tax Law through Law no. 11 of 2020 concerning Job Creation ( Law 11/2020 ). In Law 11/2020, currently, dividends received by WPOPs or domestic entities are excluded from income tax objects under certain conditions. This is stated in Article 4 paragraph (3) letter f cluster of the Income Tax Law in Law 11/2020.

Then, there is a new provision in Article 26 paragraph (1b). Article 26 paragraph (1b) confirms that income received or earned by WPLN in the form of interest including premium, discount, and compensation in connection with the guarantee of debt repayment is subject to a rate of 20% of gross income. This provision has been in effect in the previous period but has not been explicitly stated in the Income Tax Law.

Then, the following year, the government revised the Income Tax Law by issuing Law no. 7 of 2021 concerning Harmonization of Tax Regulations ( Law 7/2021 ). In the seventh period, there are additional types of income tax objects Article 4 paragraph (2) letter an of Law 7/2021 in the form of interest or discount on short-term securities traded on the money market.

In addition, there are also changes in Article 4 paragraph (2) letter e of Law 7/2021. Previously, the article only stated that certain other income could be subject to final tax. However, Article 4 paragraph (2) letter e of Law 7/2021 stipulates that certain other income, including income from business, received or earned by taxpayers with a certain gross turnover, is subject to final income tax.

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