Indonesia Changes VAT, Luxury Sales Tax

by Mary Swire, Tax-News.com, Hong Kong

18 September 2009

Indonesia’s parliament has passed a law with changes to value added tax (VAT) and sales tax on luxury goods, aimed at helping those on lower incomes while supporting investment.

The law, which will be effective from April 1, 2010, puts the maximum rate of luxury tax up to 200%, from the present 75% ceiling. The minimum rate will stay at 10%. While the law defines "luxury goods" as those which are not essential necessities, the actual products to be included as luxuries, and their applicable tax rates, will be confirmed in regulations to be issued by the government shortly.

The current rate of VAT will stay at 10%, but the government has been given the possibility of changing its rate between 5% and 15%. Any future changes to the VAT rate must, however, be approved by parliament. Staple foodstuffs (e.g. fresh meat, milk and fruit) will be exempt from VAT, as will mining commodities and food and beverages served at restaurants or hotels.

Non-producing companies can withhold their VAT payments but, if they have not produced after three years from set-up, they must transfer the unpaid tax. In a move that could encourage mergers and acquisition activity in the economy, the transfer of taxable assets (e.g. property and vehicles) in such cases will no longer be subject to VAT.

VAT refunds will be available for foreign tourists traveling via airports, if the goods they have purchased carry VAT of at least IDR500,000 (USD50). Neighboring Malaysia, Singapore and Thailand offer similar refunds.

In addition, to encourage the country's nascent Islamic markets, the double taxation arising from the transfer of goods within Sharia-compliant financial transactions will also be stopped.

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