Value Added Tax on online services will become the new norm

Jakarta by night Photo: Rizky Maharani

Come 2020, most of ASEAN’s citizens could find themselves paying more for digital services. Indonesia is the latest ASEAN nation to draft new tax legislation on online products and services.

By Joelyn Chan

With the gradual decline of brick and mortar establishments, governments’ tax coffers are shrinking. Governments are grooming local e-commerce sectors and online marketplaces to fill the void. Now, it is time for them to reap some rewards and collect taxes from foreign companies that offer digital services in their country.

Some 50 countries have introduced some form of Goods and Services Tax (GST) or value-added tax (VAT) on imported digital services. These tax rates range between 5% and 27%. In a few months time, Singapore and Malaysia will join this global tax movement. Indonesia is hot on their heels with new draft regulations of its own.

Indonesia is eager to implement VAT in the digital space

According to the 2018 Google-Temasek report, the Indonesian Internet economy is the largest and fastest-growing in the region. Its large user base of 150 million people propelled the Internet economy to US$27 billion in gross merchandise value in 2018. It is expected to grow to US$100 billion by 2025.

In July 2019, Indonesia announced its plans to draft new regulations to impose VAT on online products and services provided by offshore businesses. Essentially, the new VAT rules target e-commerce firms, content providers, start-ups and other Internet-based economic activities.

However, this is not the first time the government announced such a tax regulation. In April 2019, new regulations targeting online marketplaces, excluding social media-based e-commerce, were supposed to be rolled out. If it had been, online vendors with revenue exceeding IDR 4.8 billion (US$337,000) would have to pay VAT at a rate of 10%. At the last minute, the regulation was cancelled due to confusion among the public.

Although the new digital tax regulations are still being drafted, they seem to be an improvement from the previous attempt. A wider scope, designed to include social media e-commerce businesses and content providers, will allow the authorities to target a bigger slice of revenue from the country’s burgeoning digital market. The authorities can also learn from the previous outcry and better manage public sentiment.

Photo: Informed Mag

Indonesia should not blindly follow the early implementers of digital tax

With effect of January 1, 2020, Singapore will become the first ASEAN nation to enforce a 7% GST on businesses providing digital services. The city-state stands to gain US$90 million in additional tax revenue. Following Singapore’s decision, Malaysia will also introduce a 6% tax on digital services.

However, it may not be wise for Indonesia to start off with a 10% VAT on digital services. The nation’s digital sector is still growing. According to Bank Indonesia, the value of transactions through online marketplaces in May 2019 stood at around Rp 28.8 trillion (US$2.02 billion). That is an increase of 38.46% on April’s figures.

A high tax rate could disrupt the country’s investment climate. A dip in investment could be a stumbling block as Indonesia grooms its e-commerce sector to become the backbone of the digital economy. Indonesia has grand plans to be the biggest in Southeast Asia in 2020.

A lower rate of 5% could be an interim measure as the government learns how to fairly impose the tax on everyone.

To compensate for an eventual decline in traditional sources of tax revenue, governments will turn to digital taxes. However, Indonesia must tread carefully. The nation needs to devise a comprehensive plan to capture taxes from the growing digital market without stymying growth.