Indonesia to Tax World’s Fastest-Growing Internet Market

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By Lien Hoang

Indonesia has an open ear for companies debating a planned e-commerce tax, but a tough fist for those that defy the levy, a government spokesman told Bloomberg BNA March 21.

Tax Directorate spokesman Hestu Yoga Saksama said his office will announce the online tax by mid-2017, pushing the government deeper into a growing but unruly section of the internet where the likes of Alibaba, Lazada, and eBay have been doing business for years. Indonesia is gathering input from several ministries, he said, as well as from industry players.

“We will make them comply, because the regulation also [will] have some penalties for those who [do] not comply,” Saksama said.

Tax authorities are mulling ways to cut a slice of Indonesia’s $1.7 billion e-commerce pie, which will swell to $46 billion by 2025, according to a May 2016 report from Google and Temasek, Singapore’s sovereign wealth fund. No other Southeast Asian country comes close, with the next-biggest market for online sales, Thailand, expected to reach $11.1 billion by 2025.

Saksama said when officials adopt a rate, they’ll take into account corporate income and value-added taxes, which are 25 percent and 10 percent, respectively.

“Unfortunately, we’re not sure on numbers yet, but most important is that we can tax them [companies] effectively and efficiently,” he said in a phone interview.

Online Marketplaces Present Challenge

But Jason Lamuda, founder and chief executive officer of e-retailer Berrybenka, questioned how much the government could tax transactions online. On the one hand, websites like his already pay VAT because they hold inventory and sell goods directly, Lamuda said. On the other hand, he said, websites that connect buyers and sellers don’t necessarily earn revenues, which could be taxed.

“The tricky part comes to online marketplaces” and classifieds, Lamuda told Bloomberg BNA, referring to companies like Alibaba’s Taobao, Craigslist, and Instagram. “Platforms are just [the] facilitator and may not take any commission from transactions.”

The Google/Temasek report pegged Indonesia’s 19-percent annual growth in internet users as the highest rate in the world. Granted, that starts from a low base—about half of the country is online, compared with two-thirds of the population in nearby Malaysia and Vietnam.

Indonesia’s connected citizens are tech-savvy, but Internet penetration is low and Indonesia “has a long way to go in the digital age,” McKinsey & Company said in a September 2016 report. The report described Indonesia as “in a nascent stage of digitization.” If Indonesia embraces digitization, it can realize an estimated $150 billion in growth—10 percent of gross domestic product—by 2025, the McKinsey report said.

Tax Collectors’ Challenge

The country’s transition into the digital age is creating a challenge for tax collectors.

“E-commerce is quite different because they do not have a definite physical presence,” Saksama said. “As you know, regular stores are clearly visible, in terms of how many stores they have, where they are, their turnover. Well, that’s what makes it difficult, difficult to track [e-commerce].”

As more of Indonesia’s 260 million people buy their notebooks and necklaces online, it’s natural for the government to tax their digital activities, said Tomy Harsono, a partner at tax advisory Roedl & Partner in Jakarta.

“It’s true that e-commerce businesses are increasing in recent years, like [in] every other country, it’s a new behavior,” Harsono told Bloomberg BNA. “So I can understand the tax office reacts to what happens in the market.”

He urged officials to harmonize the internet tax with guidelines from the Organization for Economic Cooperation and Development. The OECD is trying to establish a consensus for regulating online commerce since so much of it crosses borders. One OECD recommendation, for example, is to tax online purchases in the country where people consume the products.

To contact the reporter on this story: Lien Hoang in Ho Chi Minh City at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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