Tax Obligations for Individuals and Corporation

Tax is a substantial matter for most country in the world. In Indonesia, tax
has an important role as it is the largest source to fund state budget. Even though
it is one of the key to keep a nation running, society do not consider tax as a
beneficial thing. Due to lack of tax education, many people do not understand tax
obligations well.

So, what actually tax is? According to The dictionary of Modern

Economic, taxation means “compulsory levies on private individuals and organs
tons made by government to raise revenue to finance expenses on public goods
and services and to control the volume private expenditure in the economy.”
Meaning that taxes are collected in order to maintain government expenses on
public goods and services.

Tax is a responsibility and could be forced to the society. Regarding to

Article 23A of The 1945 Constitution which is the legal basis of tax imposement,
“Taxes and other compulsory levies for state purposes are regulated by Law.” And
regarding to Taxation General Provisions and Procedures, “Tax is a compulsory
contribution to the state owed by an individual or entity that is compelling under
the law, by not getting direct compensation and used for the state's needs for the
greatest prosperity of the people.” It is clear that taxation in Indonesia has a strong
legal basis, so, people should not be hesitate to pay taxes. Instead, taxpayer should
be vacillating if they do not fulfill their tax responsibility because they might have
to pay administration sanctions of not being obedient.

One of the tax responsibility in Indonesia is income tax. The Income Tax
Law states that income is any additional economic capability that is received or
obtained by taxpayers, both from Indonesia and outside Indonesia, that can be
used for consumption or to increase the taxpayer's wealth, by name and in what
form even. In the context of individuals, income can originate from business
activities, free employment or other income. At present, the state has given trust to
companies and the public for initiatives to count, report and deposit taxes or self-
assessment. Income tax is one of the example of the self-assessment system which
enforced to simplify tax report.

Regarding to Income Tax Law, the subjective tax liability of an individual

begins when the individual is born, resides, or intends to reside in Indonesia and
ends when he dies or leaves Indonesia forever. Whereas the business entity's
subjective tax obligation begins when the entity is established or domiciled in
Indonesia and ends when it is dissolved or no longer domiciled in Indonesia.

If the tax subject that receives income is a child, the tax obligation is
carried out by the tax payer. The Tax Insurer is an individual or entity responsible
for paying taxes, including representatives who exercise rights and fulfill the
obligations of taxpayers according to the provisions of tax laws and regulations.
Even though a child has fulfilled subjective requirements but has not fulfilled the
requirements to obtain a Taxpayer Identification Number (TIN or NPWP in
Indonesia) as a Taxpayer, the tax obligations are carried out by the taxpayer or
supervisor.

Once a person reaches adulthood he can carry out his own obligations by
registering to get a TIN. The requirement to get a TIN is a Self-Identity Card,
which is a National Identity Card (KTP) or other identity card that refers to
ownership of a KTP, for example a driving license or passport.

Since fulfilling the subjective and objective requirements, a person must

register to obtain a TIN. However, individual taxpayers who receive income under
non-taxable income are not required to register to obtain a TIN. A person whose
income is below the non-takable income could also register to get an TIN in order
to study taxes.

Individual who perform business activities and carrying out bookkeeping

calculate net income by subtracting the business circulation from the cost of goods
sold and operating expenses. The net income from subsequent business activities
will have several fiscal adjustments to the commercial net income in order to
calculate taxable income based on the Income Tax Law along with its
implementing regulations, which can be either increase or decrease the taxable
income.

Taxpayers who carry out business activities or free work but the
circulation of their business or gross circulation is less than 4,8 billion rupiah a
year, Taxpayers can use Net Income Calculation Norms. In addition, taxpayers
who have free jobs such as doctors, lawyers, notaries, accountants, consultants,
appraisers, actuaries and architects are also required to report their gross income
and income tax.

Tax income can also be received or obtained by a domestic individual

taxpayer in connection with work or position, services, and activities related to
work in the form of salary, wages, honorarium, benefits and other payments. In
this case the tax calculation will refer to the provisions of the Article 21 Income
Tax Law. Income received in connection with its tax work will be deducted by the
employer, government treasurer, or organizer of the activity.

In addition to the various income mentioned above, taxpayers are also

required to report other domestic income such as interest, dividends, royalties,
rent, rewards and prizes, profits from sale/transfer of property, and other income
received or obtained by the taxpayer himself, wife, and child/adopted child who
are not yet mature in the relevant tax year.

Tax not only stand as a source of state income or budgetary function, but
also has an income distribution function. Personal income tax is one of the
instruments to overcome the inequality of income distribution between high-
income people and low-income people. But, how? The general personal income
tax rate in Indonesia imposes a progressive tax rate. The principle of progressive
tax rate is that those who are wealthy must bear a greater tax burden than from
those who are poor. So low income individuals not only pay less tax, but they pay
a smaller percentage of their income in this form of tax rate. Of the various types
of taxes, this progressive income tax is most in line with the goal of increasing
income equality. The imposition of the progressive tax rate is at the same time a
manifestation of the theory of endowment where taxes are charged to the society
based on their economic capabilities.
 Aside from individual taxpayer, all business entities in Indonesia, whether
in the form of Limited Company, Firms, Limited Partnership, Permanent
Establishmnet and others that have a Tax Identification Number, are obliged to
pay taxes. Business entity has an obligation to pay taxes from the time it is
established or domiciled in Indonesia. This obligation will end when the entity is
dissolved or no longer domiciled in Indonesia.

To get the nominal taxable income of the entity, reduce fiscal net income
by compensating for fiscal losses. Fiscal net income is the net income received by
domestic taxpayers, whether from business activities or not, after passing fiscal
adjustments based on tax provisions. Meanwhile, fiscal net compensation is a loss
experienced by the agency. When using bookkeeping, the loss can be
compensated for five consecutive years.

There were some tax rates imposed for business entity. They differ based
on how much the company gain. If the company gain less than 4,8 billion rupiah,
it could use whether the general rates of 25 percent or 0,5 percent tariff based on
Government Regulations number 46. If the company gain more than 4,8 billion
rupiah but less than fifty billion rupiah, it will receive a tariff reduction by fifty
percent of the general tariff. There were some other tariffs that will not be
explained in this writing.

Tax is improtant to a country to fund and fulfill the government necessity.

In Indonesia, income tax is one of the component of state income which carry
budgetary and income distributon functions. The tax imposement for individuals
and corporation is different based on what they do for living, how much do they
gain from their job or business, what are their burden and so on. In order to make
a better condition for the next generation, tax obedient needs to be improved to
hasten developement in all sectors. Thus, as a citizen, we can contribute by paying
taxes.