A Simplified, Straightforward Employee Income Tax

By Andrean Rifaldo, the Directorate General of Taxes officer

On December 27th, President Joko Widodo officially enacted the Government Regulation Number 58 Year 2023 (PP 58/2023). This policy alters the tax calculation scheme for employees' income, commonly known as Income Tax Article 21.

The decision took effect this January, bringing changes that will impact the amount of tax deducted from employees' monthly income. In the previous provisions, the aforementioned tax deduction was calculated based on the employee's annual income minus certain incurred costs, such as job-related expenses, pension contributions, and social security premiums.

This net income was then reduced by the non-taxable income threshold and subjected to graduated tax rates defined in Article 17 of the Income Tax Law. However, this scheme posed complexity for employers in calculating the appropriate tax amount. Differences in interpreting the permitted types of expenses and tax rates risked resulting in lower or higher tax deductions than intended.

The introduction of PP 58/2023 became a step to address these challenges by introducing an effective tax rate scheme. In this new scheme, the monthly calculation of employee income tax becomes simpler, involving only the direct multiplication of the employee's monthly income to the applicable tax rate.

Yet, it should be emphasized that the implementation of this new scheme will not impose additional tax burdens on employees. This is because the effective tax rate scheme only applies to months other than the last month of the current year or the last month the employee works if they cease employment before the end of the year.

The calculation of Income Tax Article 21 in the last month still uses the progressive scheme as per the original provisions to determine the remaining annual tax to be paid. Therefore, the tax deduction amount reported by employees in the Annual Tax Return will remain the same, whether under the old or new scheme.

Within the current scheme, the effective tax rates are divided into three categories based on marital status and the number of dependents an employee has. Each category has a different minimum threshold of income that is not subject to tax.

Category A is intended for those who are unmarried with a maximum of 1 dependent, or married but without dependents. Employees in this category are not subject to tax if their monthly income does not exceed Rp5.4 million (approx. US$350).

Category B is designed for those who are unmarried but have 2-3 dependents, or married with 1-2 dependents. The monthly income threshold not subject to tax in this category is higher at Rp6.2 million (approx. US$400)

Category C is intended for those who are married with 3 dependents. Employees in this category will not be subject to tax if their monthly income does not exceed Rp6.6 million (approx. US$425).

For employees whose monthly income exceeds these thresholds, Income Tax Article 21 will be deducted according to the effective rates set in the PP 58/2023. The percentage of these effective rates will increase with the amount of their income.

As an illustration, a married employee without dependents would fall into Category A. If their monthly income is Rp10 million (approx. US$640), the corresponding effective rate will be 2%, resulting in a monthly tax deduction of Rp200,000 (approx. US$12).

For employers, this new method is clearly simpler and carries minimal risk of errors. Additionally, employees will find it easier to verify the accuracy of the tax amount deducted from their income.

This scheme applies not only to private sector employees but also to civil servants, military and police personnel, government officials, retirees, members of boards of commissioners and supervisors, as well as non-permanent employees receiving monthly income.

The Directorate General of Taxation (DJP) is actively disseminating information to ensure public understanding of this new policy. The public is urged not to worry about the emergence of additional tax burdens, as the scheme change is solely aimed at creating better simplicity in tax administration, as part of the ongoing tax reform.

*) This article represents the author's personal views and does not represent the stance of the institution. The Indonesian version of this article has been published on Kompas.com on January 8th, 2024.

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