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ISD POLICY BRIEF: E-COMMERCE TAXATION

(Indonesia Ministry of Finance Regulation No. 210/PMK.010/2018)

A) BACKGROUND
As the fourth most populous country with increasing middle class population and internet
users, Indonesia is a thriving place for e-commerce development. Middle class household will
increase from 19.6 million in 2016 (4th largest globally) to 23.9 million in 2030 (Thapa, 2017).
Consuming class (individuals with net annual income above USD 3600) will have its size
expand from 85 million in 2020 to 135 million in 2030 (Afif, 2014). The number of internet
user will also increase by almost twofold from 84 million in 2017 to 150 million in 2023. In a
survey conducted by Morgan Stanley in 2018, 65% of the respondents had only started online
shopping within the past year, which means e-commerce is a relatively new concept for
consumers.
It is estimated that that around USD 5 billion of e-commerce revenue come from formal e-
tailing (through marketplace/other buy-and-sell platforms) while around USD 3 billion come
from informal e-commerce which takes place in social media platforms (McKinsey, 2018).
Other estimations put Indonesia’s e-commerce size at USD 12.2 billion in 2018 (Retail News
Asia, 2019). The revenue of e-commerce market will double from USD 8.25 billion in 2017 to
USD 16.46 billion in 2023 (Statista, 2019). However, McKinsey even proposed a more radical
estimate, which put the e-commerce size to balloon to USD 65 billion in 2022, mimicking the
trajectory of China’s e-commerce in 2010-2015 period. Around 30% of which will come from
e-commerce activities that are not transferred from offline commerce, but generated in the
online market.
Despite its huge potential, Indonesian e-commerce is still in early stages of development.
Indonesia ranks 90 out of 151 countries for UNCTAD’s B2C e-commerce Index in 2018, which
measures the infrastructure/environment’s readiness to support e-commerce (32%
individuals with internet access; 49% of individuals (age 15+) with an account at financial
institution; 66 index-unit of secure internet servers per 1 mil. population; and 35 score-unit
of UPU Postal Reliability). Indonesia’s e-commerce suffers from limited logistics network
coverage and inconsistent service quality due to inadequate logistics infrastructure that is
scattered throughout 922 inhabited islands of the archipelago. Both financial and internet
connectivity indicators also still lag behind other Asian countries, although there have been
much improvements.
E-commerce platforms help both consumers and businesses. E-commerce expand customer’s
choice and reduce transportation costs especially for those living outside Java (11% to 25%
more savings for consumers outside Java). E-commerce support 4 million jobs today and has
been predicted to increase by more than six fold to 26 million jobs in 2022 (McKinsey, 2018).
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Marketplace platforms, where businesses and customers alike can buy and sell products
facilitated by integrated payment and logistics facility, can help SMEs to expand their business
without the need to set up their own websites which makes it a cost-effective solution. These
platforms enable customers to search for similar products without the hassle of searching at
different store-pages. The adoption of transactive e-commerce platform brings the most
benefits as compared to lower stages of ICT adoption (email; static website; and interactive
website), including extending market reach, increased sales, improved company image,
increased productivity, and improving external communication (Rahayu & Day, 2017). The
payment system embedded in marketplace platforms can also be a solution to increase
financial inclusion.
Figure 1: E-Commerce Platforms and Supporting Businesses in Indonesia by Category

(Source: Trendingbisnis.com)
The Ministry of Communications and Information-Technology is actively encouraging SMEs to
join marketplace platforms through the “Gerakan Ayo UMKM” programme which was
created in partnership with several marketplace-platform companies. In 2018, there are 7.2
million SMEs using marketplace platforms to sell their products/services, which is close to the
government’s target of 7.3 million. However, this number is still relatively small compared to
the 63 million MSMEs in total and 36% of them (20 million+) who use social media platforms
(Yuniarni, 2018).
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With the informal sector dominating the economy (estimated 93% of businesses are
unregistered), encouraging micro businesses to join e-commerce platforms can be a tool to
formalise them. In fact, micro businesses with less than five employees dominate the informal
sector. Most of them do not register due to lack of desire for business expansion and/or
making loans from formal financial sources, avoiding taxation, and above all high
administrative cost (Rothenberg, et al., 2016). The benefits of e-commerce offer incentives
for micro-businesses to register formally, especially if some of the procedures are embedded
in the platform registration process in a simple manner.
However, the government’s decision to impose VAT on products sold at e-commerce
platforms can harm the effort to increase MSME’s presence in e-commerce platforms. It is
feared that as e-commerce is still in its early stages of development, this taxation may hamper
the effort to bring MSMEs into formal tailings at marketplace platforms. The notion of
taxation on e-commerce activities itself has been debated for long. Earlier publications such
as Basu (2002) argue that taxing e-commerce may be beneficial for developing countries due
to shrinking tax base. However, as e-commerce has shifted from B2C to C2C model and as
internet is more widely available to the population, taxing e-commerce may add extra cost
for small-scale businesses and consumers alike. Yapar, et al. (2015) argued that e-commerce
taxation may bring problems around tax authority, double taxation, and other legal problems.

B) SUMMARY OF THE MOF REGULATION NO.210/2018

The Ministry of Finance’s Regulation No. 210 of 2018 stipulates the taxation procedures that
are meant to provide a simpler administrative process and encourage the tax compliance of
e-commerce-based businesses/merchants. This regulation is issued to create an equal
imposition of taxation for conventional and online-based businesses/merchants alike. The Tax
Administration (Directorate General of Taxation) is tasked to socialise this regulation before
it is being enforced.
The intention of this regulation is to raise government revenue and collect the data of e-
commerce-based businesses/merchants, allowing the government to monitor online
economic activities and potential tax revenue that can be accrued. This regulation is also
intended to help the formalisation effort of micro and small-scale businesses by obliging them
to be registered formally as tax-paying business. Being formally registered brings benefits to
businesses such as ability to apply for loans/funding at formal financial institutions and clear
legal status – avoiding potential conflict of interests.
For e-commerce-based businesses especially MSMEs and those eligible to be taxpaying
businesses, 0.5% tax on gross revenue is deemed as unburdening. The rate itself has been
lowered by half from previously 1% tax on gross revenue (according to Government
Regulation (PP) No. 46 of 2013).
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The MoF’s Regulation (PMK) No. 210 of 2018 was created to regulate taxation procedures for
e-commerce based businesses/merchants, part of government’s effort to cater this fast-
growing type of business. Before the introduction of this regulation, taxation on e-commerce
based businesses/merchants is regulated under the less-binding Circular Letter of Directorate
General of Tax: SE-62/PJ/2013 from 27 December 2013; and SE-06/PJ/2015 from 5 February
2015. Those circular letters oversee the tax-deduction and/or income tax on e-commerce
based transaction, and clarifying the classification of e-commerce based
businesses/merchants in Indonesia.
The government became more serious in regulating taxation on e-commerce since the
introduction of Presidential Regulation (PP) No.74 of 2014 (Roadmap of Electronic Based
Commerce). The Roadmap shows the government’s plan to simplify taxation procedures for
e-commerce based MSMEs, or those with less than IDR 4.8 billion of revenue in a year (in
compliance with Government Regulation No. 46 of 2013). Under this provision, when the
revenue of a business exceeds IDR 4.8 billion in a tax year, general income tax will be imposed
automatically.
All businesses that has commercial (goods and services) activities through online retail
platforms (i.e. marketplace), classified advertising, daily deals, and other social media
platforms must follow related regulations and procedures on VAT, Luxury Goods Tax, and
Income Tax, as well as import duty. The MoF Regulation No. 210 of 2018 does not create a
new tax but assigning existing tax regime to the new business model (e-commerce). In this
regulation, e-commerce platforms are obliged to withhold the VAT and report the tax
authority for all transactions conducted in their platforms.

C) PUBLIC RESPONSE ON THE E-COMMERCE TAX REGULATION

Indonesia E-Commerce Association (idEA)
As the association of third party platforms bridging merchants and consumers, idEA strongly
opposes this regulation. The main objection for this regulation is it could harm MSMEs which
uses e-commerce platforms to sell their products/services. MSMEs comprise a huge portion
of businesses that use e-commerce platforms, either privately owned or shared (i.e.
marketplace). Furthermore, 80% of MSMEs joining e-commerce platforms (as recorded by
idEA) are microbusinesses, 15% small-sized business, and only 5% are medium-sized
businesses. The performance of these MSMEs are precarious and prone to external pressures.
The introduction of this regulation could drive them out of e-commerce platforms or even out
of business. On the other hand, e-commerce platforms (marketplace companies) have made
a huge investment in attracting small businesses to sell and market their products/services in
their platforms.
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Traders/Businesses
E-commerce – based businesses/merchant strongly opposes this regulation as they are the
main impacted party in this regulation. As e-commerce platforms are obliged under the
regulation to collect the tax for every transactions, merchants may be disincentivised to do
transactions through those platforms, reversing the effort to bring small businesses to online
e-commerce platforms. Small businesses may choose to market their products through social
media which makes it harder to monitor/regulate.
Academics
Academics also show objection to this regulation. This regulation may bring a boomerang
effect for regulators and could affect the economy negatively especially if there is lack of
preparation and dissemination. Businesses/merchants may cease to utilise e-commerce
platforms and return to conventional means or social media, which is more fragmented and
harder to regulate and monitor – therefore driving those businesses semi-clandestine. Taxing
e-commerce activities itself is intended to bring fair taxation regime – so both conventional
and online-based businesses are treated equally and allows e-commerce based
businesses/merchants to be registered formally. Imposing taxation on e-commerce on will
also widen the revenue base for government. However, as e-commerce currently still
accounts for less than 10% of retail sales1 (although growing fast), it is best to wait until the
sector has reached its maturity and for customers to get well accustomed with online
shopping.

D) CASE STUDY: INDIA’S E-COMMERCE TAX

The government of India introduced the ‘equalisation levy’ through the Financial Act of 2016
which imposes a levy on ‘any specific services’ received by non-residents of India, whereas
the services are provided by residents of India (businesses and professionals). The same levy
is also imposed on transactions conducted by non-residents with no permanent business
establishments in India, therefore making foreign entities subject to the Indian levy when they
sold their goods/services to the Indian market. The levy was set at 6% of the transaction
volume for every transaction. ‘Any specific services’ being imposed with the levy refers to
activities such as: online advertising and related activities; provision of online facilities or their
supporting services. The main objective of this levy is neutralise the unfair advantage accrued
by business entities operating in India but with without permanent establishment.
The equalisation levy is being imposed in the same manner with ‘withholding tax’ on the
volume of specific service payable on non-residents. The regulation is the culmination of
Indian tax authority’s effort to impose taxation on digital content/advertising providers such

1
https://jakartaglobe.id/context/indonesias-ecommerce-market-larger-than-estimated-consumer-habits-
changing-study
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as Google and Yahoo. Before, there was a dispute between Right Florist Pvt. Ltd., Yahoo India
Pvt. Ltd., and People Interactive India Pvt. Ltd. that utilise digital services from non-residents
outside the Indian jurisdiction which means the revenue being accrued to the non-resident
entities are not taxed accordingly.
The equalisation levy is imposed on ‘any specific services’ exceeding INR 100,000 in value,
which is conducted by Indian residents providing professional services/conducting business
in India, as well as by non-residents with a permanent business establishment in India. This
levy is imposed on business-to-business transactions only (Deloitte, 2016).

E) ISD’S RECOMMENDATION: THE WAY AHEAD

The citizen’s trust is important for taxation to be imposed effectively, whereas the
government must convince the citizens that the tax is being re-distributed transparently and
efficiently for development and the running of the state, which means the tax is levied for
greater good. Indonesia itself suffers from low tax compliance as shown by its relatively low
tax ratio (12%), which is caused by the dissatisfaction with the way the tax system is
implemented and the inefficacy in the tax revenue redistribution and its misuse (Rahman,
2017).
With high public disapproval around the MoF Regulation (PMK) No. 210 of 2018, the
regulation should not be implemented in haste without proper preparations. There are
several things need to be prepared by the government:
1. Socialisation and education of tax and the benefit of being registered as taxpayer
(wajib pajak). An effective socialisation must be conducted in regular basis and with
the cooperation of e-commerce platform companies, regional government, SME
centres, banks/financial institutions/cooperatives, etc. It is important for small
businesses/individuals to understand the benefit of having taxpayer ID (NPWP) – such
as the eligibility to: access to funding through formal financial institutions;
conducting/participating in a tender process; participate in government-initiated
trade expo.
2. The Ministry of Finance should cooperate with e-commerce platforms (especially
marketplace) to access their merchant databases. Administration and record-keeping
system are fundamental and must be well-established before the implementation of
this regulation.
3. Mapping the segmentations of e-commerce based businesses according to revenue
and type of business. This will help the government determine which segments need
intensive tax-compliance monitoring. The Ministry of Communication and Informatics
has previously classified e-commerce based businesses into 3 categories: start-ups,
MSMEs, and well-established enterprises.
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4. Simplifying and digitalise tax system/procedures (i.e. registration, payment, and

reporting). It has been commonly known that Indonesian small businesses are
disincentivised from registering formally due to complex administrative procedures.
5. The government must not require marketplace platforms (or other e-commerce
platforms that act as third party) to collect VAT. Obliging e-commerce platform
providers to withhold the tax of their users may create further legal implication as
they are not employers and do not provide users with income, therefore they cannot
be legally categorised as tax-withholder third party.
6. Taxation system for online transaction must be well-established prior to the
implementation of this regulation. The government’s sudden decision to implement
e-commerce taxation is seen as a spontaneous act to generate revenue from a
contemporary consumption phenomenon. As exemplified by India’s Financial Act
2016, all online based commerce – conducted domestically or with other jurisdictions
with large transactions – are the main subject of the levy, instead of targeting small
businesses/merchants that use online platforms.

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