President Joko Widodo officially ratified the rules related to the average effective rate (TER) for income tax (PPh) Article 21, issued on 1 January 2024. The provision is stated in Government Regulation (PP) number 58/2023 concerning Withholding Rates for Income Tax Article 21 on Income in Connection with Work, Services, or Activities of Individual Taxpayers.
The effective tax rate is the average tax rate paid by a person. It’s shown as a percentage and represents the share of a person’s income that will go toward federal taxes. The effective tax rate provides a more realistic picture of an individual’s tax burden than the nominal or statutory tax rate. It takes into account various factors, such as deductions, credits, and exemptions, which can significantly affect the overall tax liability.
The effective rate of Income Tax Article 21 withholding consists of the monthly effective rate and the daily effective rate. The monthly effective rate is classified into three categories. Category A is for non-taxable income (PTKP) with unmarried status without dependents (TK/0), unmarried with one dependent (TK/1), or married without dependents (K/0). Category B for non-taxable income with a status of not married with two dependents (TK/2), not married with three dependents (TK/3), married with one dependent (K/1), or married with two dependents (K/2). Finally, Category C is for non-taxable income with a married status with three dependents (K/3).
The government has also just released new regulations that serve as guidelines for implementing income tax deductions in Article 21 and/or Article 26. These instructions are contained in the Minister of Finance Regulation (PMK) 168/2023. PMK 168/2023 also accommodates the provisions regarding the effective rate of income tax Article 21. The effective rate of income tax Article 21 was previously regulated in Government Regulation (PP) 58/2023. The regulation also outlines the provisions of income tax Article 21 for non-employees.
The effective rates are contained in the appendix of PP 58/2023. In its appendix are 127 monthly and daily effective rates consisting of 44 category A monthly effective rates, 40 category B monthly effective rates, 41 category C monthly effective rates, and 2 daily effective rates.
The current income tax rate uses the average monthly effective rate, which ranges from 0 percent to 34 percent. This mechanism will provide more convenience and certainty in tax deductions. The average effective rate of ITA 21 is determined by considering each layer of gross income and non-taxable income. Thus, there is no significant deviation between Income Tax Article 21 calculated using the effective rate and Income Tax Article 21 that applies so far.
In addition, taxpayers with income below Rp.5.400.000 per month will still be subject to a monthly rate of 0 percent or accessible from the imposition of income tax. In Indonesia alone, the highest effective rate of 34 percent is imposed if the taxpayer has an income above Rp—1.400.000.001 per month.
The average personal income tax rate in the world is 40%. Therefore, with this moderate effective rate setting, the income tax rate in Indonesia is still relatively low compared to other tax jurisdictions. The income tax rate reaches 45 percent in jurisdictions like the UK, South Korea, Germany, France, China, and Australia.
The withholding mechanism through TER aims to simplify the calculation of income tax 21. The scheme of withholding and collection of income tax 21 carried out by the employer is relatively complex due to the application of progressive tax rates to the provisions of non-taxable income. Calculating income tax 21 is simplified to provide convenience to employer taxpayers. Currently, the procedure for calculating income tax 21 is very complex, with 400 calculation scenarios. Thus, it is necessary to simplify the calculation method to facilitate the administration of income tax deductions for employees.
With the enactment of this government regulation, employer taxpayers only need to calculate Income Tax Article 21, which must be deducted by multiplying the gross income of employees by the average effective rate that is already available in the table. The calculation of Income Tax Article 21 using the general rate is only carried out at the last tax period or in December each year.
The average effective rate is essential to be implemented to reduce potential errors in the withholding/collection of Income Tax Article 21. This effective rate scheme includes calculating the Non-Taxable Income facility each employee taxpayer is entitled to utilize. Thus, it will minimize deduction errors due to changes in Non-Taxable Income or the implementation of progressive rates as is currently done.
The average effective rate of Income Tax 21 will facilitate monthly calculations without changing the real tax burden by each employee based on the Income Tax Law. Indonesia has also adopted the year-end adjustment pay-as-you-earn (PAYE) system, which means that Income Tax 21 deductions are made monthly every tax period by considering the amount of annualized income tax. In addition, at the end of the year, adjustments will be made so that the deductions made are by taxable income, so there will be no significant changes in the principle of deductions. It is only a simplification of monthly deductions by the employer.
Besides benefiting employers, the Directorate General of Taxes will also benefit from the effective rate of Income Tax 21. This is because the monthly Income Tax 21 Tax Return monitoring process is more straightforward and manageable.
