As part of its ongoing commitment to promoting economic inclusivity and enhancing the growth of micro, small, and medium enterprises (MSMEs), the Government of Indonesia has implemented a preferential income tax regime in the form of a 0.5% final income tax scheme. This simplified taxation mechanism is designed to alleviate the administrative and financial burdens typically faced by smaller business entities in meeting their tax obligations, thereby encouraging formal business participation and improved tax compliance.
The scheme was originally introduced under Government Regulation No. 23 of 2018 (GR 23/2018) as a strategic fiscal policy to support MSME development through a turnover-based tax rate rather than a profit-based assessment. This approach allowed qualified MSMEs to pay a final tax of 0.5% calculated on gross revenue, offering simplicity, transparency, and predictability in their tax affairs.
Recognizing the need for legal harmonization and broader tax reform, the Government subsequently issued Government Regulation No. 55 of 2022 (GR 55/2022) to replace and refine the provisions of GR 23/2018. GR 55/2022, enacted as part of the implementing regulations of Law No. 7 of 2021 on the Harmonization of Tax Regulations (UU HPP), consolidates various income tax treatments and provides a more comprehensive legal framework governing the application of the final income tax rate for MSMEs.
Through GR 55/2022, the government reaffirms its commitment to building a tax environment that supports entrepreneurship, encourages voluntary tax participation, and fosters sustainable business development, particularly among smaller enterprises across Indonesia.
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Overview of the 0.5% Final Tax Scheme
The 0.5% final income tax scheme is a special tax facility provided by the Government of Indonesia to support the growth of Micro, Small, and Medium Enterprises (MSMEs) through a simplified and affordable taxation mechanism. Instead of applying the conventional income tax regime—where tax liability is calculated based on net income (i.e., gross revenue minus allowable expenses)—eligible MSMEs are permitted to pay a final income tax at a fixed rate of 0.5% on their gross turnover.
This turnover-based taxation model significantly reduces the complexity of tax compliance, particularly for smaller businesses that may not yet have sophisticated accounting systems or resources to maintain detailed financial records. As such, the scheme is aimed at encouraging the formalization of MSMEs, enhancing tax compliance, and fostering a culture of responsible taxation from the early stages of business operation.
Under Government Regulation No. 55 of 2022 (GR 55/2022), the use of this final income tax rate is subject to specific limitations, as follows:
- For corporate taxpayers, including limited liability companies (Perseroan Terbatas/PT), the scheme may be applied for a maximum period of three (3) fiscal years, commencing from the first year the business records taxable revenue; or
- The scheme may be utilized until the taxpayer’s annual gross turnover exceeds IDR 4.8 billion in any fiscal year—whichever occurs first.
Once a taxpayer has exhausted the three-year period or surpassed the gross revenue threshold, whichever is applicable, they are no longer eligible to use the 0.5% final tax scheme and are obligated to transition to the standard income tax regime. Under the standard regime, taxpayers must compute taxable income based on actual profit (gross income minus deductible expenses), and apply the applicable progressive corporate income tax rates.
It is important to note that the transition must be done immediately in the following fiscal year, and taxpayers are required to begin maintaining appropriate bookkeeping practices in accordance with Indonesian tax regulations.
This final tax scheme reflects the government’s broader initiative to create a more inclusive and accessible tax system for small businesses, while also preparing them for eventual integration into the full tax compliance framework as their business capacity grows.
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Legal Basis Transition: From GR 23/2018 to GR 55/2022
Government Regulation No. 23 of 2018 served as the initial legal framework for this tax facility. However, with the issuance of GR 55/2022, the government has consolidated and updated various provisions regarding income tax treatments, including the final tax scheme for MSMEs. GR 55/2022 is enacted under the authority of Law No. 7 of 2021 on the Harmonization of Tax Regulations (UU HPP), aligning with Indonesia’s broader tax reform agenda.
Taxpayers who had previously applied GR 23/2018 are now governed by the provisions under GR 55/2022 effective from January 1, 2022.
Eligibility Criteria
The 0.5% final tax rate applies to MSMEs that meet the following criteria:
- Gross Annual Turnover does not exceed IDR 4.8 billion in the fiscal year;
- The business must be categorized as a Micro, Small, or Medium Enterprise (UMKM/UMK) in accordance with the prevailing regulations;
- The taxpayer must not be engaged in industries or business sectors that are excluded by regulation, such as mining or financial services;
- The taxpayer must not be part of a business group that has consolidated revenue exceeding the threshold.
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Applicability to Newly Established Entities
Newly established business entities may benefit from the 0.5% final income tax scheme, provided they satisfy the eligibility criteria stipulated under Government Regulation No. 55 of 2022 (GR 55/2022). This provision offers substantial advantages for start-up companies and first-time entrepreneurs by simplifying initial tax compliance and minimizing the administrative burden associated with conventional income tax reporting.
From the outset of their commercial operations and revenue-generating activities, newly formed entities—particularly limited liability companies (PT)—are permitted to adopt this turnover-based tax scheme. This means that even in their inaugural fiscal year, provided they record gross income and meet the regulatory requirements, such entities may calculate and remit their income tax at the final rate of 0.5% of gross revenue, rather than computing tax based on net taxable income.
The application of this tax facility is not automatic and requires the taxpayer to register and declare their intention to use the 0.5% final tax scheme when submitting their tax return. Failure to do so may result in the entity being taxed under the standard income tax system.
It is crucial to highlight that the usage period of this facility is limited to a maximum of three (3) fiscal years for corporate taxpayers, beginning from the fiscal year in which the company first realizes revenue. This duration is not renewable or extendable, even if the company does not generate consistent income in subsequent years. Furthermore, if the entity’s gross annual turnover exceeds IDR 4.8 billion within any fiscal year, the facility shall cease to apply immediately in the following tax period, irrespective of whether the 3-year limit has been reached.
By allowing new businesses to take advantage of a straightforward and predictable tax mechanism, the government aims to encourage formalization of business activities, reduce early-stage compliance costs, and support growth during the critical startup phase. This scheme serves as a gateway for MSMEs to establish a strong foundation in responsible taxation while preparing for the transition to full tax compliance as their operations expand.
Benefits of the 0.5% Tax Regime
The implementation of the 0.5% final income tax scheme under Government Regulation No. 55 of 2022 (GR 55/2022) presents a range of practical and strategic benefits for eligible Micro, Small, and Medium Enterprises (MSMEs). This regime is specifically designed to accommodate the unique characteristics and limitations often faced by smaller business entities, especially in their early stages of growth.
Key advantages of the scheme include:
Administrative Simplicity
One of the most prominent benefits of the 0.5% regime is the elimination of the requirement to compute net taxable income. Under this scheme, MSMEs are not obliged to prepare detailed profit-and-loss statements or calculate deductions and allowable expenses. Instead, tax liability is determined solely based on gross turnover, thereby significantly reducing the complexity of tax filing and record-keeping. This is particularly valuable for businesses that lack in-house accounting expertise or cannot yet afford professional tax advisory services.Cash Flow Efficiency
By applying a flat rate to gross revenue, the 0.5% tax scheme offers greater predictability and stability in cash flow management. Businesses are able to plan their finances with confidence, as the amount of tax payable is directly proportionate to sales rather than variable net income. This is especially beneficial for businesses operating with slim profit margins or fluctuating operational costs, as it simplifies budgeting and reduces the risk of unexpected tax liabilities.
Encouragement of Business Formalization
The availability of this low, simplified tax rate serves as an incentive for informal or unregistered businesses to formalize their operations and register as tax-compliant entities. This, in turn, promotes greater participation in the national economy, expands the government’s tax base, and facilitates access to formal business opportunities such as financing, public procurement, and partnerships with larger enterprises. For many MSMEs, the reduced tax burden lowers the perceived cost of entering the formal sector.Progressive Compliance Pathway
The 0.5% scheme serves as a transitional mechanism that enables MSMEs to build a positive compliance history with the tax authorities. Over the course of the 3-year period (or until the turnover threshold is exceeded), MSMEs are given time to adapt to the regulatory environment, strengthen their internal financial systems, and prepare for eventual graduation to the standard income tax regime. This phased approach supports long-term business sustainability and fosters a culture of accountability and good governance within the MSME sector.
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Conclusion
The implementation of the 0.5% final income tax scheme under Government Regulation No. 55 of 2022 represents a pivotal fiscal policy aimed at strengthening Indonesia’s micro, small, and medium enterprise (MSME) sector. By offering a simplified and proportionate taxation mechanism, the government has created an accessible entry point for smaller businesses to engage in formal economic participation while fostering a culture of tax compliance and financial accountability.
This scheme not only eases the administrative and financial obligations for eligible MSMEs but also serves as a strategic bridge toward full integration into the conventional tax regime. For newly established entities and early-stage businesses, it provides a vital opportunity to focus on operational growth and market development without being encumbered by complex tax reporting requirements.
Ultimately, the 0.5% tax regime underscores the Indonesian Government’s commitment to inclusive economic development, regulatory simplification, and long-term sustainability for the MSME sector. All eligible taxpayers are encouraged to leverage this facility responsibly and in accordance with prevailing regulations, thereby contributing to a more robust and equitable national economy.
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ET Consultant is a Business Consultant and Legal Consultant Expert that provides support for local and multinational clients to start and manage their business operations in Indonesia. ET Consultant specializes in Business Incorporation, Licensing & Legal, Accounting & Taxes, Immigration, and Advisory Services.
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