As the fourth most populous country in the world, supported by good political and economic stability, Indonesia’s large domestic market offers awide range of investment opportunities for foreign and domestic investors.
The Indonesia economy accelarated by 5.18% in the second quarter of 2016 as compared to a downwardly revised 4.91 percent growth in the March quarter and above market consensus of a 5 percent expansion. It was the strongest growth rate since the fourth quarter 2013, driven by a faster increase in private consumption and government spending while investment eased and exports fell at a slower pace. GDP Annual Growth Rate in Indonesia averaged 5.35 percent from 2000 until 2016.
Indonesia is diverse and is amoing the most culturally rich countries on Earth. Add to this its enermous mineral, marine, and natural resources and it is evident that it ranks as a major economic force in the region. Following the economic and financial crisis that hit the country in 1997, Indonesia government recognised the important role of foreign investment to play in reconstruction of the Indonesia's economy. During following years, successive governments enacted legal and regulatory reforms design to make Indonesia a competitive destination for foreign direct investment.
Setting Up a Business
There are variuous ways for an investor to set up presence in Indonesia, depending on the investors's type of business.
Taxation in Indonesia
Taxation in Indonesia adopts self assessment method, where every taxpayer has rights to calculate their own income tax based on tax regulation. There are separate laws covering income tax, value added tax (VAT) and sales tax on luxury goods, other tax laws include the law on the taxing of land and building and stamp duty.
Under the prevailing Indonesian tax law, there are two subject of taxpayer : individual and corporation. Income tax is applied to individual and corporation on increase in economic wealth. A company is treated as a resident of Indonesia for tax purposes by virtue of having its establishment or its place of management in Indonesia. A foreign company carrying out business activities through a permanent establishment (PE) in Indonesia will generally have to assume the same tax obligations as a resident taxpayer.
Tax rate and period
Normally, Corporate Income tax rate is 25% of taxable income applies for corporate taxpayer. But since July 2013, Directorate General of Taxes (DGT) issued new regulation for taxpayer who has gross revenue not more than IDR 4.8 Billion. The tax rate for taxpayer in this category is 1% from gross revenue. The normal tax period is January to December. If corporate taxpayers would like to use a different tax period, e.g. July to June, they would have to obtain an approval from the DGT and then maintain the approved tax period consistently.
For individual taxpayer, DGT applies progressive tax rate, are as follows:
5% : IDR 0,- up to IDR 50 million
15% : IDR 50 million - up to IDR 250 million
25% : IDR 250 million - up to IDR 500 million
30% : > IDR 500 million
The above rate is only for an individual who resides in Indonesia for more than 183 days within 12 months period or and an individual who within a particular year is present in Indonesia and intends to reside in Indonesia.
The rates of withholding tax is vary depend on the nature of income source. The maximum withholding tax rate for domestic taxpayer is up to 15%. While, withholding tax rate for employee is same as individual taxpayer. Payments to overseas on certain sources of income may be liable to withholding tax of 20%. However, a reduced WHT rate maybe applicable where a tax treaty is applied.
Tax liabilities for a particular period or year must be paid to the State Treasury through a designated tax-payment and then accounted for at the tax office through the filling of the relevant tax returns.
The monthly income tax liabilites must be paid every 10th or 15th day of the following month. For VAT, the payment must be settled before the VAT return is filed. VAT return filing is done on a monthly basis by the end of the following month.
Late tax payments incur penalties at 2% per month while for late reporting, the penalties are IDR 100,000 per month for monthly tax reporting and IDR 1,000,000 for corporate tax return.
Value Added Tax (VAT) and Luxury goods Sales Tax (LST)
VAT is applicable on deliveries (sales) of good and services within Indonesia at a rate of 10%. VAT on export of foods is zero rated while the import is subject to VAT at a rate 10%. VAT from their customers or clients can be recognised as input VAT. An excess of VAT input maybe carried forward. The penalties for late reporting IDR 500,000 per month.
Some goods are subject to LST upon import or delivery by the manufacturer to another party at rates ranging from 10% to 200%.
Audit and Accountancy
Business are required to maintain accounting records properly. In Indonesia, the financial statements must be prepared according to Indonesian Financial Accounting Standards (SAK is the local acronym), which are adopted from International Financial Repoting Standards (IFRS).
Generally, business entities use the 1 January to 31 December as their accounting period.
Accounting books and financial statements are prepared using the company's functional currency. Most business entities are using Indonesian Rupiah as their functional currency. However, there a number of companies are using functional currency other than Rupiah.
For tax purpose, the prevailing tax regulation only allows a company to use US Dollar currency. The company should obtain approval from the tax authority before use US Dollar currency in their bookkeeping.
By law, all accounting books records and financial statements should be prepared in Indonesian language. A company is allowed to use other languanges only after get an approval from the Minister of Finance.
There are three accounting standards as company's guidance to prepare its financial statement:
Generally, only SAK and SAK ETAP frequently used. But for the listed company, Financial Accounting Standards (SAK) is mandatory.
Audited Financial Statements
The Minister of Trade requires the filling of the audited financial statements for every limited liability that meets the following criteria: