Understanding VAT and Luxury Goods Tax in Indonesia

Definition and Scope

VAT is a broad-based consumption tax imposed on most goods and services sold in Indonesia, as regulated under Law No. 42 of 2009 and further harmonized under Law No. 7 of 2021. VAT is typically charged at each stage of production and distribution, ultimately borne by the end consumer. Businesses meeting certain revenue thresholds must register as Taxable Entrepreneurs (Pengusaha Kena Pajak or PKP) and are responsible for collecting VAT on behalf of the government.

VAT Application

1. Domestic and Imported Goods and Services: VAT is applied to a wide range of domestic and imported goods and services, covering items such as electronics, furniture, clothing, and household appliances. Additionally, professional services like consulting and legal advice are subject to VAT, ensuring a comprehensive tax base. Imported goods are taxed upon entry to Indonesia, creating a level playing field between foreign and local products.
2. Export Goods and Services: Exported goods are zero-rated, which means businesses can sell internationally without charging VAT, enhancing competitiveness abroad. Exporters can also claim VAT refunds on input costs, improving cash flow. However, some services provided to foreign clients—such as consultancy services that create value within Indonesia—may still incur VAT, maintaining a balanced approach for services reliant on local resources.
3. Exemptions and Special Rates: Certain essential goods and services, such as staple foods, healthcare, and educational services, are exempt from VAT to support affordability and accessibility. Additionally, special rates may apply to specific sectors, like public transport or select agricultural products, allowing the government to respond to economic needs and provide targeted support.