<![CDATA[Indonesia's gambling with a tax on e-commerce. Will it pay off?]>

Indonesia's small- and medium-sized enterprises (SME) and e-commerce platforms are up in arms over a plan to levy taxes on online businesses, as authorities in Southeast Asia's biggest economy grapple with tax collection from its burgeoning digital sector.

The Indonesian tax authority is set to introduce the e-commerce tax scheme next month, getting the ball rolling by tabulating taxpayer identification numbers from SMEs that sell products and services on online marketplaces. The task of logging these ID numbers will be assumed by e-commerce platforms operating in the country, which include a pair of Alibaba-backed firms, Bukalapak and Tokopedia. Alibaba owns the South China Morning Post.

While the details have yet to be formalised, pending feedback from all stakeholders, the tax authority also said SMEs with annual online sales of less than 4.8 billion rupiah (US$336,000) are subject to 0.5 per cent income tax, similar to their bricks-and-mortar counterparts. Only sellers on online marketplaces will be taxed, not those selling via classified advertisements and social media such as Instagram and Facebook.

As with many issues in an election year, discussions of this subject have boiled over into politics. In the country's second presidential debate last month, challenger Prabowo Subianto claimed many SMEs had complained about the e-commerce tax plan.

"[SMEs] told me that they're facing difficulties to grow their businesses because of red tape. I heard that they will be taxed too, this is what they complained to me about," the former general said. "If elected, I will cut regulation [in the digital sector] and I will support any efforts to develop small and medium online businesses."

Tokopedia is among the e-commerce platforms responsible for logging the tax ID numbers of SMEs using its online marketplace to sell their goods and services. Photo: Handout

But is it reasonable to deregulate Indonesia's digital commerce sector?

Proponents of the tax say there is no better time to start than the present, as Indonesia is still creating a road map for its digital economy. E-commerce has become the hottest vertical in the country's tech sector. The market is expected to be worth US$46 billion in 2025, or 8 per cent of the total retail market, growing from just US$1.7 billion in 2015, according to a joint report by Google and Singapore's state investment arm Temasek.

The huge potential of e-commerce is backed up by the country's large middle-class population and increasing internet penetration, as well as stronger buying power in second- and third-tier cities such as Manado in North Sulawesi and Palembang in South Sumatra that have been largely overlooked by traditional retailers focusing on Java. More than half of the country's 260 million people are online.

The sector's promise has also attracted investments from foreign tech companies. Chinese tech giants Alibaba and Tencent are investors in Indonesia's four unicorns, the name given to tech start-ups with a valuation of more than US$1 billion.

Alibaba is an investor in Tokopedia and Bukalapak, while Tencent has invested in home-grown ride-hailing and on-demand services firm Go-Jek. It also has an indirect investment in online ticketing platform Traveloka through e-commerce firm JD.com, in which Tencent owns a 20 per cent stake.

Meanwhile, Amazon has committed to investing 14 trillion rupiah in Indonesia over a 10-year period, according to finance minister Sri Mulyani Indrawati. The American tech behemoth's first foray into the Indonesian market will be its cloud computing business Amazon Web Services.

President Joko Widodo is also aware of e-commerce's potential. He has launched an ambitious programme to ensure an online presence for the country's 59 million SMEs, which together contribute more than half of Indonesia's GDP but have their growth hindered by a lack of funding and other resources.

Many Indonesian SMEs do not have a habit of bookkeeping and few have taxpayer IDs. Photo: AFP

According to the communications ministry, of that total, only 4.6 million SMEs have gone digital: 36 per cent use messaging apps such as WhatsApp and BlackBerry Messenger, 9 per cent are in online marketplaces and 18 per cent utilise social media such as Facebook, Instagram, and Twitter. The government has set a target of 8 million online SMEs for this year.

Other analysts argue that while the premise of the e-commerce tax is commendable, the authority should postpone its implementation to fine-tune the regulations, which remain vague.

Before enforcing it, Indonesia also must first develop infrastructure that allows for more efficient tax collection and higher tax revenue, such as a national payment gateway and a single ID system, according to Yustinus Prastowo, executive director at the Jakarta-based Centre For Indonesia Taxation Analysis.

"The tax authority would be wise to spend the next year revising the rules, then enforcing it by 2021," Prastowo said. "For now I think they're pushing it, the regulation was just issued in January."

The sentiment is shared by SME operators who have questioned the lack of consultation over the policy, as well as its perceived lack of fairness as vendors on social media platforms and foreign online marketplaces are exempt from the tax.

"I joined some online-seller communities, and many are shocked that the policy is going to be imposed in April," said Putri Wanna, an entrepreneur in Jakarta who has been selling household items, smartphone accessories and other goods since 2014 on e-commerce platforms Bukalapak, Tokopedia, and Shopee, owned by Singapore-based internet firm Sea. "They will comply with the rules but they need more time. The authority should have expanded their consultation period because sellers in big cities might be more aware [of the impending tax] than sellers in small cities."

Wanna said many SMEs do not have a habit of bookkeeping and few have taxpayer IDs, adding another burden for e-commerce operators tasked with ensuring compliance with the latter requirement.

"We don't want to be required to guide our vendors on how to create tax IDs, that's not our job. Our job is to run the business, to make money," said Ignatius Untung, chairman of trade group Indonesia E-commerce Association (IDEA), which counts 40 online marketplaces as its members.

"We have asked the finance ministry to consider creating more tax brackets for online vendors, because many vendors on online marketplaces are first-time entrepreneurs that don't track their profit and expenses. The spirit is positive but I don't think the government understands the concept of an e-commerce business."

Indonesia has become the latest country in Southeast Asia to try and tax the digital sector after Thailand, Vietnam, the Philippines, and Singapore, while other countries such as Malaysia prefer to take a wait-and-see stance before introducing their own digital tax scheme.

The Philippines in 2016 became the first country in the region to impose an e-commerce tax - a 12 per cent VAT on online sales worth more than 1.92 million pesos (US$36,690) a year, and 3 per cent VAT for sales under that threshold - for both buyers and sellers.

Chinese tech giants Alibaba and Tencent are investors in Indonesia's four unicorns, the name given to tech start-ups with a valuation of more than US$1 billion. Photo: Reuters

Thailand last year approved a regulation requiring banks and other financial institutions to report annual money transfers worth more than 2 million baht (US$62,700) to tax authorities. These reports will help its revenue department track online vendors, which typically accept payments via bank transfers.

Vietnam already requires foreign e-commerce firms to have domestic representative offices and pay VAT of 10 per cent, while individual online sellers with annual sales revenue of over US$4,300 will also be subject to tax. In Singapore, any online purchases under SG$400 (US$294) are exempt from goods and services tax (GST), but the city state is set to introduce 9 per cent GST for imported digital services such as Netflix or Spotify on January 1, 2020.

In the short term, experts say, Indonesia's e-commerce tax won't dent foreign direct investment into the country's digital sector as enforcement remains lax. In the long run, it might lead to other taxes such as digital payment tax and reverse charge tax, for which customers may be liable.

Analysts also warn that many SMEs will switch to social media if tax compliance remains focused on online marketplaces. When that happens, the government would suffer a loss of tax income due to the lack of monitoring on these platforms.

So, for now, it might not be wise for Indonesia to follow presidential challenger Subianto's suggestion to overturn existing regulations in the e-commerce sector.

This article originally appeared on the South China Morning Post (SCMP).

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