The Indonesian Tax Directorate General is mulling a plan to implement taxes for online transaction. According to Kontan, a 10% value added tax will be applied to all online transactions on top of the transaction value. This plan had been tabled by the Directorate in its meeting with the Indonesian Internet Service Provider Association (APJII). This is another step by the government to drive state revenue collection after targeting the small business and the real estate sectors.
The implementation will not be done in the near future, at least not within this year. The mechanism is currently still under discussion. The Tax Directorate will set up a meeting with all e-commerce companies and individual traders to get them to agree in applying the 10% VAT tax to every transaction.
As a comparison, in the United States where the online market has already reached maturity, a number of states has begun to collect taxes as of 1 July. Online transaction taxes apply not just to physical products but also those of digital nature such as music, applications, movies, and games.
Online shopping transactions in the US as of 2010 have reached 16% of all transactions and the numbers keep growing. In the mean time, there is no comparable and reliable data available for Indonesia according to Andrias Ekoyuono, VP business development of Ideosource. Ideosource currently is home to a number of e-commerce companies such as Everindo, Saqina, and PasarMinggu.co.
Indonesia is comparatively still very new to online transactions. The percentage is said to be very small relative to all retail transactions. Implementing tax to online transaction when the people are still in the transformative stage tends to be counter productive. In the United States, the Federal government moved to enact the Internet Tax Freedom Act (ITFA) in 1998 to increase the growth of e-commerce businesses and only began to collect taxes 15 years later.
According to Ekoyuono, “It’s entirely normal for e-commerce to be considered as a source of tax revenue by the state. But don’t let it end up stunting the growth of e-commerce in Indonesia. The implementation of 1% revenue tax on SMEs who make up to Rp 4.8 billion a year can be a burden for small e-commerce ventures that’s popular with consumers”.
Applying taxes to online transactions require two very important support structures. First is a banking architecture that has managed to track every type of transaction including online, whether they use debit, credit, or bank transfers as methods of payments.
In Indonesia, such an architecture is called the National Payment Gateway which is being prepared by Bank Indonesia to be launched this year. One of the efforts towards this is to connect interbank transaction service providers such as those using the networks provided by ATM Bersama, Prima, and Artajasa.
Unfortunately there is no confirmation whether this national payment gateway will be launched this year or rescheduled, considering that there are less than six months to go in the year and as yet, there hasn’t been any further socialization about this program.
The second thing is making it compulsory for every company wishing to conduct e-commerce to have a legal entity through regulation to enable tax reporting. The legal entity can be a PT or a more flexible form such as an LLC in the US. An LLC, along with its advantages and issues, may be a model legal entity that works for small to medium businesses both online and offline.
Unless these supporting frameworks operate properly, it’s not prudent to have it bypassed and directly move towards tax implementation. With e-commerce not making up a significant portion of all retail sales in Indonesia, taxation becomes a disincentive to the growth of the industry.
The next issue is how will they treat common transactions by individuals such as for used items, or those done through classified ads where effectively the transaction does not occur online?
Sites such as Tokobagus, Berniaga, Kaskus FJB, as well as mailing lists and social networks such as BlackBerry Messenger, Instagram, Facebook, and Twitter, are support structures that do not collect fees for transactions. Payment for transactions originating on those sites often occur through bank transfers, ATMs and even cash and without the use of invoices or legal proof. In other words, these are traditional transactions which happen to be using online channels for advertising purposes.
“The real problem lies not in the size of the tax but the implementation, the billing mechanism, because there must be tax documents involved among other things”, said Ekoyuono.
Not to mention the different treatments for the types of taxes involved in various transactions. For e-commerce, applied taxes, which can vary in numbers, may differ according to the type of transaction whether it involves foreign products for local consumption, local products or foreign consumption, or local products for local consumption.
One day, online transactions will be taxed. Even so, the steps to reach that state must be done carefully to ensure readiness and optimum reach in revenue for the government.
-Additional reporting by Aulia Masna
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