Indonesia imposes VAT on sales of digital products and services from July

Indonesia VAT
Photo by Milenius

JAKARTA (Reuters) – Indonesia will require big internet companies to pay VAT (value-added tax) on sales of digital products and services from July, a move that other countries may also adopt as they seek to boost revenues following the coronavirus pandemic.

Southeast Asia’s largest economy will impose a 10% VAT on digital products sold by non-resident internet companies with a significant presence in the Indonesian market, including streaming services, applications and digital games, beginning July 1, according to a regulation published on the finance ministry’s website.

Indonesian authorities have previously said services by streaming platforms like Spotify and Netflix would be among those subject to the new tax. Neither company responded to requests for comment.

Analysts say the COVID-19 pandemic has accentuated a push by governments around the world to tax internet giants, who could see a boost in revenues as people stay at home during global lockdowns.

“In the absence of a global compact on digital taxation, unilateral moves will flourish,” said Chatham House Asia Fellow Vasuki Shastry. “The fiscal hole due to Covid-19 makes it unstoppable.”

Nearly 140 countries from the Organisation for Economic Cooperation and Development (OECD) are negotiating the first major rewriting of tax rules to take better account of the rise of big tech companies such as Amazon, Facebook, Apple and Google that often book profit in low-tax countries.

France has also announced plans to impose a digital tax levy in 2020.

The fallout from the coronavirus is expected to make many countries even more in need of cash to restart their economies as they are set to experience deep recessions this year.

While Indonesia has aimed to get internet companies to pay their fair share of taxes for years, the move to impose VAT was announced in March under emergency measures outlined by President Joko Widodo to help the country weather the coronavirus crisis.

The package was passed by parliament on Tuesday.

With a population of nearly 270 million, the country’s digital economy is booming and is expected to reach $130 billion by 2025, according to a study by Google, Temasek Holdings and Bain & Company.

Indonesian Finance Minister Sri Mulyani Indrawati has said that imposing VAT on internet goods was to make sure the government captures the shift in people’s consumption patterns as they stay at home during a lockdown to curb the spread of the virus.

Consumers have been buying fewer physical goods, but demand for digital items has risen, she noted.

The government expects a 10% drop in state revenue this year due to the impact of the coronavirus pandemic and weak commodity prices, forecasting that economic growth will more than halve to 2.3%, from 5% in 2019. It foresees a fiscal deficit of 5.07% of GDP for 2020, the biggest in more than a decade.

The finance ministry’s tax department has been in contact with representatives of companies that will be affected by the imposition of VAT, tax office spokesman Hestu Yoga Saksama said on Friday but declined to name any of the companies.

Indonesia’s move could also accelerate a wider push in the region. Southeast Asian regulators held talks in 2019 for a region-wide effort to tax tech giants more.

(Reporting by Tabita Diela and Fanny Potkin; Editing by Gayatri Suroyo and Susan Fenton)

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