07 January 2021

Executive Summary on Job Creation Law: Ease of Doing Business (Specifically on Tax)

Indonesian Parliament passed an extremely comprehensive law, entitled the “Job Creation Law”. This article will comprehensively discuss about the amendments on taxation provisions.

| Margaret Rose

The principal amount of Income Tax (Pajak Penghasilan /PPh) applied in a country is often considered by business actors, including investors, as one of the primary factors, along with infrastructure, manpower, geology and geography that will determine the venue to invest or trade.   

In Indonesia, Income Tax is specifically regulated under Law No. 7 of 1983 which was then amended by Law No. 36 of 2008 (hereinafter referred to as “Income Tax Law”). Aside from being amended later by Law No. 2 of 2020, the Income Tax Law also has been amended yet again recently by a section of Law No. 11 of 2020, also known as the “Job Creation Law”  or the “Omnibus Law”.  

Amendments to provisions stipulated in the Income Tax Law is regulated under Article 111 of the Job Creation Law. Such amendments are basically additions to and revisions of the prevailing Income Tax Law, as follows:

  1. the Job Creation Law introduces a Nationality Principle in order to determine a tax subject, specifically  a foreign tax subject. This principle is an addition to Article 2 paragraphs (3) and (4) of the Income Tax Law. In this amendment, a foreign tax subject is defined as a foreign citizen who has not been domiciled within the territory of Indonesia for more  than 183 days in any 12-month period.  The term also applies to an Indonesian citizen who has been domiciled out of the territory of Indonesia for over  183 days in the past 12 months. Such an Indonesian citizen may be excluded from domestic tax subject status in Indonesia as long as he or she is domiciled in a certain foreign country where he or she performs  daily activities and has become a domestic tax subject in the country where he or she is now domiciled and also pays taxes there. 
  2. The net Income of a  cooperative is excluded from status as a tax object, and therefore is now referred to as a "non-Income tax object", as regulated in Article 4 paragraph (3) of the Income Tax Law.  This means that  its income is no longer subject to income tax in Indonesia.
  3. Proceeds of endowment insurance policies which were originally not subject to Income Tax, are no longer listed as  non-Income Tax object  as a result of the amendment to Article 4 paragraph (3) letter e of the Income Tax Law. This means that such proceeds shall now be subject to Income Tax, even though this is not specifically stated in the Job Creation Law.  
  4. As an amendment to Article 4 paragraph (3) letter f of the Income Tax Law, a dividend may be excluded from income tax as long as at least  30% of such funds are reinvested within the territory of Indonesia.
  5. Deposit funds for Hajj administration and other incomes obtained from endowment funds from certain financial instruments are also excluded from the Income tax object status, as regulated in Article 4 paragraph (3) letter o of the Income Tax Law.
  6. Residual profits received by registered religious or social institutions which are reinvested in some form of infrastructure for at least 4 years from the date such profits were received, are excluded from the Income Tax object status, as regulated in Article 4 paragraph (3) letter p of the Income Tax Law.
  7. Income Tax rates on interest originated or paid by a domestic tax subject in Indonesia to a foreign tax subject may be reduced from 20% to a rate later to be determined by the Government Regulation.


Furthermore, the Job Creation Law also highlights issues regarding Value Added Tax, or VAT (Pajak Pertambahan Nilai /PPn) and Tax on Luxury Goods (Pajak Penjualan atas Barang Mewah/PPnBM). VAT and Tax on Luxury Goods are taxes which are indirectly regulated under Law No. 8 of 1983 as amended by Law No. 42 of 2009 (hereinafter referred to as “VAT Law”).  The VAT Law and its implementing regulations have been modified frequently in order to keep up with business developments.  Several provisions stipulated in the VAT Law are considered unsuitable under present conditions, among others those related to the shifting of business practices from conventional trade to e-commerce.  It is expected that the provisions relating to VAT which are set out in the Job Creation Law will offer a solution to modify the current regulations.

The Job Creation Law amends 4 Articles in the VAT Law, i.e. Article 1A and 4A regarding VAT objects, Article 9 regarding Input Tax crediting, and Article 13 regarding Tax Invoices.

Article 4A regulates the type of goods which are and are not subject to VAT.   The VAT Law does not specify type of goods (classified as mining products extracted from its source) which are excluded from VAT. Accordingly, the Job Creation Law has included coal mining products as the type of goods excluded from VAT. Unfortunately, other mining products excluded from VAT are not yet regulated under the Job Creation Law.  Further, the amendments to Article 9 of the VAT Law basically constitute a relaxation of VAT obligations, including in relation to  Input Tax crediting (as stipulated in Article 112 of the Job Creation Law).  Moreover, the Job Creation Law has added an additional paragraph to Article 13 of the VAT Law regarding Tax Invoices. Taxable retail business actors may issue a Tax Invoice, for sales to end customers, without stating the buyer’s identity.  They need include only the seller's name and signature.

These amendments generally reflect the effort to provide certainty and clarity with regard to several provisions which for the past years have resulted in disputes between Taxpayers and Tax Authorities. These amendments are expected to be convenient for Medium, Small, and Micro Business (UMKM) actors, and as well to prevent tax disputes among the relevant parties.

In addition to the amendments made to the Income Tax Law and the VAT Law, the Job Creation Law also has amended several provisions regarding the imposition of administrative penalties under Law No. 6 of 1983, as amended by Law No. 16 of 2009, regarding General Provisions and Tax Procedure (hereinafter referred to as “General Tax Provision Law”). Previously in the General Tax Provision Law, administrative penalties were imposed upon all late report submissions and underpayments at the rate of 2% per month. However, the Job Creation Law has amended the fixed rate of such administrative penalty, calling for it to be adjusted in accordance with the official monthly interest rate determined by the Minister of Finance to apply to taxpayer violations of monetary policy. The main goal of this amendment is to create fairness among business actors, in which the amount of penalties imposed upon a violation shall vary, depending on the nature of the violation itself. Whereas, the amount of penalties imposed previously did not classify the types of the violation, so that all types of violations were imposed with the same 2% penalty per month .      

Last but not least, Law No. 28 of 2009, regarding Local Tax and Retribution (hereinafter referred to as “Local Tax and Retribution Law”), has also been amended under Article 156 A of the Job Creation Law. The amendment to the Local Tax and Retribution Law was made to synchronize  local taxes. Through such amendment, the central government, through the Minister of Finance, is authorized to evaluate prevailing local regulations and drafts of anticipated local regulations in relation to local taxes and retribution. If a certain local regulation has been revoked by the President, then provisions regarding local tax and retribution under such local regulation shall no longer apply. Any violation of these amendments shall result in an imposition of penalties, among others are suspension of payments or deductions of the  regional transfer funds by the central government.


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