Indonesia drafting rules to apply VAT on online products and services

INDONESIA - JAKARTA. Indonesia is drafting new rules to impose value added tax to online products and services provided by offshore companies, as authorities target a bigger slice of revenue from the country's fast-growing digital market, a top tax official told Reuters.

Indonesia is the world's fourth most populous country with 260 million people and, according to a joint study by Google and Temasek Holdings, the value of its internet economy reached $27 billion last year and is poised to grow to $100 billion by 2025.

John Hutagaol, a tax department official, said while a global debate continued on how best to tax corporate income in this area it was generally accepted that VAT, or in some cases sales tax, could be placed on digital goods and services.

"It's the low hanging fruit and can be applied as per every country's rules," said Hutagaol, who heads the international department at the tax office.

However, to charge VAT, Indonesia would need new "implementation rules to decide on the mechanism, because the current rules only apply to conventional transactions, while digital ones are not limited by space and time," he said.

Southeast Asia's largest economy currently levies 10% VAT on all goods and services, but any business whose turnover is below a threshold of 4.8 billion rupiah ($345,000) is exempted.

The new VAT rules would be imposed on e-commerce, content providers, startups and other internet-based economic activies, Hutagaol said, adding authorities were looking to learn from the experience of Japan and Australia in applying such digital taxes.

He declined to say how long it might take to draft and bring in the new rules.

Indonesians are avid users of social media like Facebook , Instagram and Twitter, while the popularity of streaming services like Spotify and Netflix are growing.

In 2016, Indonesia investigated Alphabet Inc's Google for alleged tax evasion, including missing VAT payments on advertising revenue, but authorities eventually reached an undisclosed settlement.