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November 8, 2021

Indonesia passes wide-ranging tax law amendments

Executive summary

The Harmonization of Tax Regulations (HPP) Law was signed by the Indonesian President and officially enacted on 29 October 2021. The new HPP Law will impact Income Tax, Value-Added Tax (VAT), and the General Tax Provisions Law. It will be important to review the implementing regulations, when released, in order to understand potential impacts.

This Alert summarizes key changes introduced by the HPP Law.

Detailed discussion

The decrease in the Corporate Income Tax (CIT) rate of 20% that was previously legislated to be effective starting from tax year 2022 has now been cancelled. Consequently, the current CIT rate of 22% will continue to prevail. Similar to the previous tax law, Indonesian-listed companies will still receive an additional 3% reduction subject to certain conditions.

The VAT rate will gradually increase from 10% to 11% (effective from 1 April 2022) and from 11% to 12% (at a point in the future no later than 1 January 2025). Certain taxable goods/services may be subject to a specific VAT rate.

In addition, there is a broadening of the VAT base to remove the exemptions for a number of previously exempt services (e.g., medical, financial services). Certain previously exempt essential goods and mined minerals will now also be subject to VAT. However, there is a possibility for the implementing regulations to provide VAT concessions for certain of the aforementioned goods and services.

The HPP Law introduces Carbon Tax on the purchase of carbon-containing goods or any activities that produce a certain amount of carbon emissions. The Carbon Tax will commence on 1 April 2022 and will first apply to coal-fired power producers (CFPP) based on a cap and tax system. A CFPP will be given a maximum cap on their carbon emissions and any carbon emissions above the cap will be subject to tax at the rate of IDR30/Kg of carbon dioxide equivalent emission. The Carbon Tax will be fully implemented and expanded to other sectors from tax year 2025 onwards, subject to conditions.

With respect to individual taxpayers, a new tax bracket of 35% for the highest income earners has been introduced for taxable income above IDR5 billion (US$350,000) per year. Previously, the highest tax bracket was 30% for taxable income above IDR500 million (US$35,000) per year.

The explanation of the HPP Law1 includes the following statements on tax avoidance:

  • The GoI is mandated to prevent tax avoidance practices which include such practices that are contrary to the “substance over form” principle.

  • Tax avoidance practices are, among other things, understating income, overstating expenses, reporting smaller operating profits compared to similar businesses, or reporting unreasonable losses for a period of more than five years since commencing commercial sales.

It remains to be seen whether this will entail real changes or simply formalizes existing approaches.

A Tax Amnesty or Voluntary Disclosure program is offered to taxpayers (both companies and individuals) that participated in the 2016 tax amnesty program and also individual taxpayers that did not participate in 2016 tax amnesty program. Disclosures must be made from 1 January 2022 to 30 June 2022. The program provides an opportunity for taxpayers to disclose assets that have not been (or not fully) reported in their annual tax returns in exchange for a final tax payment ranging from 6% to 18% subject to conditions. Additional rates from 3% to 8.5% could be imposed if the agreed conditions are not met.

The HPP Law potentially extends withholding tax obligations to parties who are directly involved or facilitate the transactions (e.g., web platforms etc.), noting that at present this obligation only falls on customers/payers.

While the previous law provides for thin capitalization rules based on a debt to equity ratio (this is currently 4:1), the law now provides for regulations to be issued using different methods to limit borrowing deductions. For example, there are indications this may be based on a certain ratio of loans to EBITDA (earnings before interest, taxes, depreciation and amortization).

The ability for taxpayers to split tax audit assessments and pursue different assessment items separately through the Mutual Agreement Procedure process and tax appeal process has been formalized.


For additional information with respect to this Alert, please contact the following:

EY Indonesia, Jakarta

Ernst & Young LLP (United States), Indonesia Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago



  1. This text is not included in the body of the HPP Law.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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