Indonesia Implements New Regulations for Withholding Tax

Starting January 1, 2024, Indonesian businesses and their employees will transition to a new monthly withholding tax system for PPh 21 income tax. This new system, mandated by Government Regulation No. 58 of 2023, streamlines the process for everyone.

Legal Basis: Government Regulation Number 58 of 2023

Government Regulation No. 58 has made key changes to employee income tax calculations. Dive into our breakdown to stay informed and navigate the new system smoothly.

Monthly Withholding (January-November)

• Simplified Effective Tax Rates: Traditional progressive tax rates have been replaced by a singular, comprehensive Effective Tax Rate (ETR). This ETR is directly applied to gross income, eliminating the need for annualization and intricate deduction calculations.
• Pre-Integrated Deductions: The ETR already incorporates relevant deductions such as non-taxable income, occupational expenses, and pension contributions, resulting in a more transparent and straightforward calculation process.

Year-End Reconciliation (December)

• Assured Accuracy: A final annual calculation utilizing the standard progressive tax rate ensures a harmonious reconciliation between ETR withholdings and actual tax owed. Any underpayments are collected, while overpayments are promptly refunded, guaranteeing precise tax compliance.

READ MORE:

• What You Need to Know About Taxation of Benefits in Kind
• Guide On Filing Corporate Annual Tax Return (SPT) In Indonesia
• Indonesia To Adopt Global Minimum Tax In 2023: What It Means For Businesses

Types of Taxable Income

The income that is liable to be taxed under PPh 21 (Income Tax on Salaries) is as follows:

• Compensation earned through employment, services, or activities in Indonesia, including salaries, wages, and bonuses.
• Pension income from pension funds.
• Regular payments from a pension fund.
• Income of board members and supervisors.
• Honorariums, commissions, fees, and other freelance and non-employee work rewards.
• Pocket money, representation money, meeting fees, prizes, and similar rewards received as part of work activities.
• Partial withdrawals from pension programs for participants who are still employed.
• Production service, bonuses, gratuities, and other irregular rewards received by former employees.

How to Calculate Your Net Income?

Calculating your net income involves subtracting eligible deductions from your gross income, representing your total earnings before taxes. Remember, only specific deductions are allowed according to tax regulations:

• Work-related expenses: Costs incurred for your job, up to a specific limit.
• Pension contributions: Payments you make towards your retirement savings.
• Religious donations: Zakat or other donations made through your employer to authorized institutions.

Effective Tax Rate Classification in Indonesia

The average effective rate (ETR) is calculated using the effective monthly rates categorized by different income ranges to determine the income tax amount.

Monthly ETR Rates

• Category A: Single with no dependent, Single with one dependent, Married with no dependent.
• Category B: Single with two dependents, Single with three dependents, Married with one dependent, Married with two dependents.
• Category C: Married with three dependents (M/3).

The applicable monthly ETR for each income range in each category can be downloaded below.

Daily ETR Rates

• 0% ETR for daily income up to IDR 450,000.
• 0.5% ETR for daily income above IDR 450,000 up to IDR 2,500,000.
• No ETR is specified for daily income exceeding IDR 2,500,000 (further guidance needed).

Who Needs to Pay PPh 21 Income Tax?

Everyone earning income through employment, services, or activities in Indonesia must pay PPh 21 income tax under the new rate. This includes both public and private sector employees, such as:

• Government officials and civil servants
• Members of the Indonesian National Army (TNI) and Police (Polri)
• Pension recipients

Understanding Income Tax Withholding in Indonesia

Calculating the amount of income tax deducted from your paycheck can be challenging. Still, with the proper guidance and resources, you can easily understand the process and take control of your finances.

Your tax amount depends on two key factors:

• Income type: Are you a permanent employee, freelancer, retiree, or something else?
• Marital status: Married, single, or somewhere in between?

Based on these, here’s how your tax is calculated:

• Permanent employees & pensioners: Enjoy predictable monthly deductions using Effective Tax Rates (ETRs).
• Board members & supervisors: Have a dedicated monthly ETR applied to your income.
• Temporary employees: Your rate varies based on income & payment frequency.
• Non-employees & others: Use the standard income tax rate.
• Overseas individuals: Pay a 20% withholding or a double taxation treaty rate.

Stay On Top of Tax and Business Reporting in Indonesia

Compliance with reporting deadlines is crucial for smooth business operations and avoiding penalties. Here’s a quick guide for individuals and organizations:

Individuals

• File your annual income tax return by March 31 of the following year. Extensions are available for complex situations.
• Extensions are available if you have additional income sources or complexities.

Companies

• Submit your annual Corporate Income Tax (CIT) return by April 30 for a calendar fiscal year. For other fiscal year-ends, the deadline is the 15th day of the third month following your fiscal year-end.
• Companies with foreign investment or in specific sectors must meet regular reporting deadlines to BPKM, the Investment Coordinating Board.

Download our free calendar with all the important reporting deadlines in Indonesia.

Simplify Your Payroll System with InCorp

Recent changes to the Indonesian tax system, specifically implementing the monthly withholding system for PPh 21 income tax, may generate initial fluctuations in employee paychecks. 

While intended to simplify the process, this shift from the traditional annual calculation can temporarily complicate businesses’ navigation of the new landscape.

InCorp Indonesia (an Ascentium Company) is here to provide a seamless and compliant transition for your company’s payroll system under the new regulations. 

By partnering with us, you can:

• Ensure accurate and timely payroll processing: Leverage our expertise to guarantee flawless payroll calculations that comply with the new regulations.
• Mitigate compliance risks: Benefit from our proactive approach to navigating the complexities of tax compliance, eliminating potential penalties, and ensuring peace of mind.
• Streamline administrative workloads: Free up valuable internal resources by entrusting your payroll needs to our dedicated team of specialists.
• Gain personalized support: Receive tailored guidance and assistance from our professionals, addressing your specific queries and concerns.

Schedule a consultation today to learn how InCorp Indonesia can streamline your payroll process and help you confidently navigate the new tax system.