Navigating the ins and outs of Value Added Tax (VAT) in Indonesia can be a bit tricky, but it's essential for anyone doing business in the country.
This article will guide you through what you know about VAT rates, what to expect, who needs to pay, and how you can stay on the right side of Indonesian law.
VAT Rates in Indonesia and Registration
The standard VAT rate in Indonesia is 11%.
This rate applies to most goods and services sold within the country. However, don’t think it’s one-size-fits-all—there are special scenarios, particularly when it comes to export activities, where different rates might apply.
If your business hits an annual turnover of more than IDR 4.8 billion, you’re required to register for VAT. But even if you’re below this threshold, registering voluntarily can be a smart move.
Why? Because it can benefit your business operations and help you claim those sweet input tax credits.
To learn more about how to register for VAT in Indonesia as a foreign-owned business.
Businesses Subject to VAT Rates in Indonesia
Domestic Sales
If you're selling goods or providing services in Indonesia, you’re subject to the VAT. This includes:
- Retail Sales: Selling products directly to consumers —think your local shops and boutiques.
- Professional Services: Offering services like legal advice, accounting, or consulting right here in Indonesia.
- Manufacturing and Distribution: Producing and distributing goods within the country, covering everything from factories to wholesale suppliers.
Import Activities
Imported goods are not exempt either—they’re also subject to VAT. This ensures that both local and foreign products are on a level playing field. If you’re in the import game, you need to be precise in calculating and paying this VAT.
Voluntary VAT Registration
Even if your business turnover hasn't quite hit the mandatory registration threshold — IDR 4.8 billion— you can choose to voluntarily register for VAT.
For example, if you're providing B2B Services to other VAT-registered businesses, you can register VAT voluntarily — your clients to claim input VAT credits.
Or, if you are selling expensive items, High-Value Goods, like electronics, jewelry, and vehicles, you can consider registering VAT.
Export-oriented businesses can also benefit from a 0% VAT rate on exports, which can help with cash flow. This includes shipping companies and trading companies.
VAT Exemptions in Indonesia
When you export goods and services from Indonesia, you can enjoy a 0% VAT rate. This means that while your transactions are VAT-reportable, the tax rate applied is zero. Here’s how this benefits various types of export businesses:
0% VAT Rates in Indonesia
- Physical Goods: If you produce items in Indonesia and ship them abroad, you get a 0% VAT rate. This includes everything from manufactured goods to artisanal products.
- IT Services: Offering system analysis, design, IT security, or cloud services used outside Indonesia? You're also eligible for the 0% VAT rate.
- Consulting Services: Providing business, management, legal, HR, or marketing consulting to foreign clients? Your services also qualify for the 0% VAT rate, making it easier to expand your client base internationally.
- Research and Development: Doing R&D for companies outside Indonesia? You also benefit from the 0% VAT rate.
- Architectural and Engineering Services: Working on design and engineering projects abroad? You’re eligible for the 0% VAT rate. This helps attract and keep international clients.
Legal Requirements for 0% VAT Rates in Indonesia
To take full advantage of the 0% VAT rate, you need to meet certain legal requirements.
- Service Level Agreement: Clearly spell out the goods or services produced in Indonesia that will be used outside the country. This ensures everything is transparent and above board.
- Documentation: Provide detailed invoices and export notifications using the standard formats from the tax office. Proper documentation keeps you in the clear and maintains your eligibility.
- Tax Invoices: Ensure you create accurate and timely tax invoices for all transactions. This is essential for staying compliant and enjoying the benefits of the 0% VAT rate.
Learn more about the tax system in Indonesia.
Case Scenario: VAT Rates
Gigi Architecture Firm provides drawings for an Australian firm that is constructing a villa in Bali. Since the project is based in Indonesia, the invoice for these services is subject to the standard 11% VAT.
Gigi Architecture Firm also supplies architectural drawings for a French firm that is building a commercial complex in Paris. Given that this project is located outside of Indonesia, the invoice for these services qualifies for the 0% VAT rate.
These scenarios show how project location determines the VAT rate: domestic projects incur the standard rate, while international projects benefit from the 0% rate.