World Bank Suggests Revising Indonesia’s VAT Registration Threshold

The World Bank has suggested that Indonesia consider lowering the annual turnover threshold for becoming a VAT-Registered Business (Pengusaha Kena Pajak/PKP) from the current IDR 4.8 billion to IDR 500 million.

According to the World Bank, reducing the threshold would bring more businesses into the tax system, encouraging more formal business transactions between small enterprises and larger companies.

Why Does the World Bank Recommend a Lower Threshold?

In its report, the World Bank states that simplifying Indonesia’s VAT registration system would not only broaden the country’s tax base but also improve tax compliance.

A lower registration threshold is expected to reduce distortions and unnecessary complexity within the tax system, while creating a more level playing field for businesses operating in the formal economy.

Data Supporting the Recommendation

The recommendation is based on the structure of Indonesia’s formal business sector.

According to the World Bank’s estimates:

• 66.4% of formal businesses generate annual revenue below IDR 1 billion.
• 46.9% of formal businesses generate annual revenue below IDR 500 million.

Based on these figures, the World Bank believes that an annual turnover threshold of IDR 500 million would better reflect the characteristics of Indonesia’s business landscape when determining VAT registration obligations.

The report also recommends removing several sector-specific VAT exemptions, including those related to extractive industries, machinery imports, and private healthcare and education services, in order to better align Indonesia’s VAT framework with international best practices.

Potential Impact

If implemented, the World Bank estimates that the proposed reform could increase Indonesia’s tax revenue by approximately 0.5% of Gross Domestic Product (GDP).

The projected increase would come from a broader tax base and improved compliance across the business sector.

Is This Already an Official Policy?

No.

It is important to note that this is only a recommendation made by the World Bank and has not been adopted as an official policy by the Indonesian Government.

As of now, the VAT registration threshold in Indonesia remains at IDR 4.8 billion in annual turnover, meaning businesses with annual revenue below that amount are not subject to any new VAT registration requirement based on this proposal.

Conclusion

The World Bank’s proposal has sparked discussion on possible reforms to Indonesia’s VAT system. Lowering the VAT registration threshold could potentially broaden the tax base, improve tax compliance, and encourage greater business formalization.

However, businesses should understand that no regulatory changes have been enacted. The current VAT registration threshold remains unchanged, and taxpayers should continue following the existing regulations while monitoring any future policy developments from the Indonesian Government.

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