Micro, Small, and Medium Enterprises (MSMEs) are businesses with a certain income that are formed to grow and develop their businesses in the context of constructing a national economy based on just economic democracy. Given the importance of MSMEs in national economy, government passed Law Number 20 of 2008 concerning Micro, Small and Medium Enterprises as last amended by Law Number 6 of 2023 concerning Stipulation of Government Regulations in Lieu of Law Number 2 of 2022 concerning Job Creation (MSMEs Law).

MSMEs Law provides a legal basis for MSMEs to obtain certainty and business justice. This is due to the fact that, despite their contribution to national economy, MSMEs still face various internal and external challenges. These challenges can be in form of production and processing, marketing, human resources, design and technology, capital, and business climate.

MSMEs Definition

In accordance with Article 1 of MSMEs Law, each business criterion determines MSMEs definition as follows:

1. Micro Enterprises are productive businesses owned by individuals and/or individual business entities that meet the micro businesses criteria;
2. Small business is a productive economic business that stands alone, which is carried out by individuals or business entities that are not subsidiaries or not branches of companies that are owned, controlled, or become part either directly or indirectly with medium or large businesses that meet small business criteria;
3. Medium Business is a productive economic business that stands alone, which is carried out by individuals or business entities that are not subsidiaries or branches of companies that are owned, controlled, or become part of either directly or indirectly with small or large businesses with total net worth or certain annual sales results;
4. Large Businesses are productive economic businesses carried out by business entities with a net worth or annual sales results greater than medium businesses, which include state-owned or private national businesses, joint ventures, and foreign businesses that carry out economic activities in Indonesia.

According to Article 6 of MSMEs Law, MSMEs criteria can include business capital, net worth indicators, annual sales results, or investment value, incentives and disincentives, application of environmentally friendly technology, local content, or the workers number based on each business sector criteria. In line with this, Article 35 of Government Regulation Number 7 of 2021 concerning Ease, Protection and Empowerment of Cooperatives and Micro, Small and Medium Enterprises, stipulates that MSMEs are grouped based on business capital criteria or annual sales results.

MSMEs business capital criteria are as follows:

1. Micro Enterprises have business capital up to a maximum of IDR 1 billion excluding land and buildings for business premises;
2. Small Businesses have business capital more than IDR 1 billion up to a maximum of IDR 5 billion excluding land and buildings for business premises; and
3. Medium Enterprises have business capital more than IDR 5 billion up to a maximum of IDR 10 billion excluding land and buildings for business premises.

Meanwhile, MSMEs sales criteria are as follows:

1. Micro Enterprises have annual sales up to a maximum of IDR 2 billion;
2. Small Businesses have annual sales more than IDR 2 billion up to a maximum of IDR 15 billion; and
3. Medium Enterprises have annual sales of more than IDR 15 billion up to a maximum of IDR 50 billion.

Legal Basis for MSMEs Taxes

Apart from MSMEs Law and its amendments, tax provisions for MSME are implemented based on:

1. Law Number 7 of 1983 concerning Income Tax as last amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations (Income Tax Law);
2. Law Number 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods as last amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations (VAT Law);
3. Law Number 20 of 2008 concerning Micro, Small and Medium Enterprises as last amended by Law Number 6 of 2023 concerning the Stipulation of Government Regulations in Lieu of Law Number 2 of 2022 concerning Job Creation (MSMEs Law).
4. Government Regulation Number 23 of 2018 concerning Income Tax on Income from Business Received or Earned by Taxpayers with Certain Gross Income (PP 23/2018);
5. Government Regulation Number 7 of 2021 concerning Ease, Protection, and Empowerment of Cooperatives and Micro, Small, and Medium Enterprises (PP 7/2021); and
6. Government Regulation Number 55 of 2022 concerning Adjustments to Income Tax Regulations (PP 55/2022).

Types of MSME Taxes

Tax provisions do not specifically regulate about MSMEs and only regulate tax obligations for taxpayers with a certain gross income. Certain gross income limits are regulated in Article 57 paragraph (1) PP 55/2022, namely IDR 4.8 billion. The gross income is total gross income in 1 (one) year from the last fiscal year prior to the relevant fiscal year, which is determined based on total gross income of business, including branches gross income. In general, types of MSME taxes are:

Income tax

In accordance with Article 56 paragraph (1) PP 55/2022, Taxpayers with a certain gross income, referred to as MSMEs Taxpayers, will be subject to final income tax within a certain period of time. Final income tax rate is 0.5% (zero point five percent). This final income tax is calculated every month by multiplying final tax rate by monthly gross income. Furthermore, Article 60 paragraph (2) PP 55/2022 stipulates that gross income of individual MSME Taxpayer up to IDR 500 million in 1 (one) fiscal year is not subject to income tax.

Since the enactment of PP 23/2018, final income tax rate is imposed within a certain period, as follows:

• 7 (seven) fiscal years for individual MSMEs Taxpayers;
• 4 (four) fiscal years for MSMEs Taxpayers in the form of cooperatives, limited partnerships, firms, village-owned enterprises/joint-village-owned enterprises, or individual companies established by 1 (one) person; and
• 3 (three) fiscal years for corporate MSMEs Taxpayers in the form of a limited liability company.

Taxpayers who have passed the above time period must use Article 17 of Income Tax Law rate or use income tax facilities of Article 31E of Income Tax Law (if corporate MSMEs gross income is up to IDR 50 billion). If MSMEs Taxpayers has used Article 17 rate, then henceforth, the MSMEs Taxpayers are no longer allowed to use final rate of 0.5%.

Furthermore, if MSMEs Taxpayers conduct transactions that are based on statutory regulations in the field of taxation with output income tax, namely income tax Article 4 paragraph (2), Article 15, Article 21, Article 23, Article 26 (except installments of income tax Article 25), then MSMEs taxpayer is obliged to carry out the tax obligations attached to it.

Value-Added Tax (VAT)

VAT Law regulates VAT provisions for small entrepreneurs. Meanwhile, based on Article 1 paragraph (1) of Minister of Finance Regulation Number 68/PMK.03/2010 concerning Limits for Small Entrepreneurs Value Added Tax as last amended by Minister of Finance Regulation Number 197/PMK.03/2013 concerning Amendments to Regulation of the Minister of Finance Number 68/PMK.03/2010 concerning Limitation of Value Added Tax Small Entrepreneurs, small entrepreneurs are entrepreneurs who for 1 (one) fiscal year deliver taxable goods and/or taxable services with total gross income not more than IDR 4.8 billion. Total gross income and/or gross revenue is total amount of delivery of taxable goods and/or taxable services made by entrepreneurs related to their business activities.

Accordance with Article 3A paragraph (1) of VAT Law, small entrepreneurs who make submissions as referred to in Article 4 paragraph (1) letters a, c, f, g, and h, are not required to report their business for confirmation as a Taxable Entrepreneur. However, small entrepreneurs can choose to be confirmed as taxable entrepreneur. Small entrepreneurs who choose to be confirmed as taxable entrepreneur are required to collect, deposit and report VAT and Sales Tax on Luxury Goods payable.

Since April 1, 2022, VAT rate is 11% (eleven percent). This rate will change to 12% (twelve percent) no later than January 1, 2025. Furthermore, VAT rate for exports as stipulated in Article 7 paragraph (1) of VAT law is 0% (zero percent).

Through the ratification of Harmonization of Tax Regulations Law, the term final VAT for MSMEs was introduced. These provisions refer to Article 9A paragraph (1) letter a of VAT Law which stipulates that taxable entrepreneur whose business circulation in 1 (one) financial reporting year does not exceed a certain amount, can collect and deposit VAT payable upon delivery of taxable goods and/or taxable services with a certain amount. This certain amount is lower VAT rate in general.

VAT with a certain amount is charged using tax invoice code 05. Input VAT associated with taxable goods and/or services delivery cannot be credited. Therefore, VAT deposited by small entrepreneurs is, in simple terms, equal to output VAT calculated at a certain amount. There is no crediting scheme in calculating the amount of VAT payable for a fiscal period. However, government has yet to ratify implementation regulations regarding certain amount of VAT for small entrepreneurs, so to implement final VAT scheme, small entrepreneurs need to wait this implementation regulations to obtain legal certainty.

Furthermore, if a small entrepreneurs deliver taxable goods that are classified as luxurious, they must also apply Sales Tax on Luxury Goods in addition to VAT. However, this type of tax is imposed only once at the time of delivery by the entrepreneur who produces or at the time of importing the luxury goods classified as taxable goods.