Indonesia: An Asian tiger regains its status Indonesia: An Asian tiger regains its status

Indonesia: An Asian tiger regains its status
31 Jul 2014

Indonesia has been growing in stature in recent years, joining the G20 in 2009 and it is now evolving into a ‘middle income’ country. The population is approaching 250 million people, with close to half considered to be working age (around 118 million strong 1).

The economy continues to grow uninterrupted since 1999, resulting in a rapidly expanding middle class, standing at 74 million (Boston Consulting Group) which may double by 2020.

An infrastructure lagging behind fast growth

On the flip side of this ‘coin’ some things continue to struggle. Transparency International ranked Indonesia joint 114th out of more than 175 nations polled in 20133 and the nation ranked at 39 in the World Competitiveness Index in 2013 (out of 60 countries).

Infrastructure continues to lag severely behind neighbouring countries, creating bottlenecks in the energy, transportation and even communication sectors. Internet speed in Indonesia ranked 146th out of 176 scored countries in 2012, according to NetIndex5.

While Indonesia is the fourth most populated country in the world, with a working age population ranking 12th in the world as a country, less than seven per cent of the population has a tertiary degree. Most people, including workers, have a maximum high school equivalent education, while a bigger portion collectively still possess a middle school or even elementary school degree. This reality affects low-skilled to highly specialised jobs

Tax awareness and conditions for compliance improve

As a result of a combination of the aforementioned factors and other variables, only a third of the working age the population is employed in the formal sector. Despite this situation, the government has made good strides as the individual taxpayer base has increased fivefold from 2005 to 2012 to around 22 million registrations.

This figure continues to improve although close to 40 per cent in the formal sector are not yet registered with the tax office and only about 6 per cent of formal sector workers in the period 2010 to 2011 received social security or other insurance benefits, as mandated by law6.

Furthermore, Indonesia is ranked 137 out of 189 economies in ease of paying taxes by PwC in 20147. This is further hampered with a low ratio of one tax officer to 1,400 taxpayers, which is double the ratio the tax office thinks it should be at8.

Despite these ‘growing pains’ the government continues to invest in human resources development for the tax office and tax officers now have more relevant educational background and competence than in past eras. Tax officers are also becoming more professional and customer oriented as their organisation is structured to have tax officers assigned to each company whose questions must be attended to in a timely manner.

Employee income tax conditions

For those in the formal sector, the tax office continues to develop supporting infrastructure and policies to encourage compliance and increase the taxpayer base. Individuals can now file their annual tax report online directly to the tax office and customer service continues to improve.

Individuals are responsible for reporting their total annual income and cumulative year-end wealth to the tax office by 31 March following the previous calendar year, which includes income earned from employers and other sources. Employee income tax in Indonesia continues to be withheld monthly by the employer and reported/paid to the tax office employers to report employee names on a monthly basis to increase transparency.

Individuals are taxed with progressive rates from five per cent to 30 per cent on overall income earned. Starting in 2013, the government lowered the tax burden by increasing the amount Individuals are taxed with progressive rates from five per cent to 30 per cent on overall income earned.

Starting in 2013, the government lowered the tax burden by increasing the amount of non-taxable income, which especially helps lower income earners and taxpayers with dependents.

Other employee statutory requirements The government continues to launch policies to increase its citizens’ welfare and this direction especially benefits employees in the formal sector, who are in a better position to benefit from policy changes. The biggest one is health insurance, with the government now mandating a state-owned institution to handle all health insurance coverage.

Previously, companies had the option of sourcing health insurance with the state-owned institution or private providers without topping up. A different state-owned institution handles workers’ accident and death insurance, in addition to social security contributions.

Health insurance with the state-owned provider will be charged at a rate of 4.5 per cent of salary to employers and 0.5 per cent from employees’ salary. The social security contributions continue to be 3.7 per cent of salary by employers and 2 per cent deduction of salary by employees.

While the implementation has been through registration and claim processing problems, the aim of the policy is well-intentioned. However, many companies continue to have difficulty registering and continue to maintain existing health plans for their employees with private carriers.

For companies that have already enrolled their employees with PT Jamsostek (the previous state-owned health insurance provider), the new state-owned carrier (BPJS) has just recently begun resolving transition and registration issues by allowing employers to print the health insurance cards themselves. As such, the health insurance coverage story is still a developing one and subject to changes, so companies are advised to take a conservative approach and proceed carefull

Summary

Indonesia is a young nation and is going through the phases of transition in many aspects of its economy, politics and society. This is felt through policies and on-the-field implementation challenges, including payroll.

Despite that, the future continues to evolve in the right direction, with recognition of the rule of law and sanctioning of lawbreakers being important in many citizens’ minds. Knowledge of best practices and innovation in implementation will further help companies operating in Indonesia to achieve long-term peace of  mind.

Greg Chen has served as CEO of PT Outsource Indonesia since its inception in 2005 and sits on the executive board of the Indonesian Outsourcing Association (IOA-ABADI). The company is an extraordinary member of the Indonesian Employers’ Association (APINDO) and Indonesian Chamber of Commerce and Industry (KADIN) member. It focuses on back-office operations, outsourcing services, such as recruitment, HR support, payroll operations, benefit/claims administration and has an outbound call centre for a mix of international, multinational and local companies and representative offices. www.outsourceindonesia.com.

Indonesia has been growing in stature in recent years, joining the G20 in 2009 and it is now evolving into a ‘middle income’ country. The population is approaching 250 million people, with close to half considered to be working age (around 118 million strong 1).

The economy continues to grow uninterrupted since 1999, resulting in a rapidly expanding middle class, standing at 74 million (Boston Consulting Group) which may double by 2020.

An infrastructure lagging behind fast growth

On the flip side of this ‘coin’ some things continue to struggle. Transparency International ranked Indonesia joint 114th out of more than 175 nations polled in 20133 and the nation ranked at 39 in the World Competitiveness Index in 2013 (out of 60 countries).

Infrastructure continues to lag severely behind neighbouring countries, creating bottlenecks in the energy, transportation and even communication sectors. Internet speed in Indonesia ranked 146th out of 176 scored countries in 2012, according to NetIndex5.

While Indonesia is the fourth most populated country in the world, with a working age population ranking 12th in the world as a country, less than seven per cent of the population has a tertiary degree. Most people, including workers, have a maximum high school equivalent education, while a bigger portion collectively still possess a middle school or even elementary school degree. This reality affects low-skilled to highly specialised jobs

Tax awareness and conditions for compliance improve

As a result of a combination of the aforementioned factors and other variables, only a third of the working age the population is employed in the formal sector. Despite this situation, the government has made good strides as the individual taxpayer base has increased fivefold from 2005 to 2012 to around 22 million registrations.

This figure continues to improve although close to 40 per cent in the formal sector are not yet registered with the tax office and only about 6 per cent of formal sector workers in the period 2010 to 2011 received social security or other insurance benefits, as mandated by law6.

Furthermore, Indonesia is ranked 137 out of 189 economies in ease of paying taxes by PwC in 20147. This is further hampered with a low ratio of one tax officer to 1,400 taxpayers, which is double the ratio the tax office thinks it should be at8.

Despite these ‘growing pains’ the government continues to invest in human resources development for the tax office and tax officers now have more relevant educational background and competence than in past eras. Tax officers are also becoming more professional and customer oriented as their organisation is structured to have tax officers assigned to each company whose questions must be attended to in a timely manner.

Employee income tax conditions

For those in the formal sector, the tax office continues to develop supporting infrastructure and policies to encourage compliance and increase the taxpayer base. Individuals can now file their annual tax report online directly to the tax office and customer service continues to improve.

Individuals are responsible for reporting their total annual income and cumulative year-end wealth to the tax office by 31 March following the previous calendar year, which includes income earned from employers and other sources. Employee income tax in Indonesia continues to be withheld monthly by the employer and reported/paid to the tax office employers to report employee names on a monthly basis to increase transparency.

Individuals are taxed with progressive rates from five per cent to 30 per cent on overall income earned. Starting in 2013, the government lowered the tax burden by increasing the amount Individuals are taxed with progressive rates from five per cent to 30 per cent on overall income earned.

Starting in 2013, the government lowered the tax burden by increasing the amount of non-taxable income, which especially helps lower income earners and taxpayers with dependents.

Other employee statutory requirements The government continues to launch policies to increase its citizens’ welfare and this direction especially benefits employees in the formal sector, who are in a better position to benefit from policy changes. The biggest one is health insurance, with the government now mandating a state-owned institution to handle all health insurance coverage.

Previously, companies had the option of sourcing health insurance with the state-owned institution or private providers without topping up. A different state-owned institution handles workers’ accident and death insurance, in addition to social security contributions.

Health insurance with the state-owned provider will be charged at a rate of 4.5 per cent of salary to employers and 0.5 per cent from employees’ salary. The social security contributions continue to be 3.7 per cent of salary by employers and 2 per cent deduction of salary by employees.

While the implementation has been through registration and claim processing problems, the aim of the policy is well-intentioned. However, many companies continue to have difficulty registering and continue to maintain existing health plans for their employees with private carriers.

For companies that have already enrolled their employees with PT Jamsostek (the previous state-owned health insurance provider), the new state-owned carrier (BPJS) has just recently begun resolving transition and registration issues by allowing employers to print the health insurance cards themselves. As such, the health insurance coverage story is still a developing one and subject to changes, so companies are advised to take a conservative approach and proceed carefull

Summary

Indonesia is a young nation and is going through the phases of transition in many aspects of its economy, politics and society. This is felt through policies and on-the-field implementation challenges, including payroll.

Despite that, the future continues to evolve in the right direction, with recognition of the rule of law and sanctioning of lawbreakers being important in many citizens’ minds. Knowledge of best practices and innovation in implementation will further help companies operating in Indonesia to achieve long-term peace of  mind.

Greg Chen has served as CEO of PT Outsource Indonesia since its inception in 2005 and sits on the executive board of the Indonesian Outsourcing Association (IOA-ABADI). The company is an extraordinary member of the Indonesian Employers’ Association (APINDO) and Indonesian Chamber of Commerce and Industry (KADIN) member. It focuses on back-office operations, outsourcing services, such as recruitment, HR support, payroll operations, benefit/claims administration and has an outbound call centre for a mix of international, multinational and local companies and representative offices. www.outsourceindonesia.com.