December 22, 2023

Risk of unfairness in the simplification of income tax PPh21

People submit their tax returns at the Directorate General of Taxes, Sudirman Building, Jakarta, on March 11, 2020

The complexity of tax calculations has become a contemporary issue in Indonesia. One component of taxation, filing for income tax cuts under article 21 (PPh 21), has been considered difficult to the point of being impractical. The Directorate General of Taxes (DJP) of the Ministry of Finance of the Republic of Indonesia has stated that in the current Article 21 mechanism, there are approximately 400 calculation scenarios for income from employment, businesses, and activities received by Individual Taxpayers.

To address this issue, DJP launched an initiative to simplify the calculations for qualifying income tax cuts under PPh 21. However, during the Government Regulation Draft (RPP) phase of the simplification, it was revealed that the simplified PPh 21 would apply an averaged effective tax rate (TER) based on their gross income and modify the qualifications for Non-Taxable Income (PTKP) based on employment type.

These modifications could be seen as overstepping the bounds of a simplification and could risk a difference in calculation compared to the previous PPh 21 mechanism, which in turn could impose unfair tax rates to taxpayers on the basis of their employment type.

This policy paper was made to review the draft for the simplified PPh 21, analyze the new calculations, gather input from stakeholders and give our recommendations regarding the draft before the simplified PPh 21 comes into effect.