My Blog · May 6, 2022

Indonesia is set to start charging 0.1% crypto VAT and capital gains in May

Early this month, the crypto sphere was met with attention-grabbing news from South Asia. It was announced that Indonesia will start taxing crypto-assets starting next month. This move is intended to net the Indonesian government additional revenue from domestic trading activity.

No crypto asset is to be excluded; not transactions, earnings, and not purchases. These charges apply even to the Indonesian archipelago which is comprised of more than 17,000 islands. 

The new taxes will also apply to some Financial-technology (Fintech) deals and services. The announcement was made amid a crypto trading boom in Indonesia. It also came at a time when most governments across the world are putting crypto regulatory measures in place.

The particulars of this new tax policy

Before getting down to the particulars, let’s start by defining a term that will keep on popping up throughout this article. What is VAT? Simply put, VAT stands for Value-Added-Tax. It is a form of taxation applied to goods and services at every step of the supply chain or the sale to the final consumers.

Now back to the new Indonesian taxation policies on crypto:

·        Tax on Crypto assets

The finance ministry of Indonesia announced that effective May 1, 2022, all crypto asset purchases will be subject to a 0.1% VAT. Additionally, all earnings from crypto transactions will be subject to a 0.1% final income tax. Also trading on unauthorized platforms will result in a higher VAT and income tax of 0.2% each.

The reason why the crypto transactions carry on a 0.1% income tax on capital gains is that these taxes will be charged on the gross transaction amount.

·        Tax on Fintech deals

In a separate regulation issued by the ministry, it was made clear that Indonesia will also charge taxes on the Fintech arena. Interest income on P2P lending will be subject to a 15% tax for domestic taxpayers and 20% for foreign taxpayers. Other Fintech services like equity crowdfunding and payment settlement were not left behind, they will also be subject to VAT.

What led to this major financial move?

·        To net additional revenue from domestic trading activity.

In February alone, Indonesia conducted cryptocurrency transactions worth close to $6 billion. Therefore, even a 0.1% tax alone could result in the government gaining over $5 million.

According to data from the Commodity Futures Trading Regulatory Agency, last year’s total crypto-asset transactions in commodity futures markets only, was about $60 billion. That amount is almost 11 times more than the value from the previous year. The government is set to tap into a reliable revenue source.

·        Indonesia has a thriving cryptocurrency market.

Did you know that Indonesia is the 4th largest nation in the world? Well, it is. With 300 ethnic groups and a total population exceeding 273 million people. Over 7 million of these people currently own some form of cryptocurrency.

A total of 11 million market participants in Indonesia deal in cryptocurrency. The said market conducted transactions worth $60 billion last year. Indonesia happens to be the biggest economy in Southeast Asia. After the COVID-19 pandemic, cryptocurrency sparked the interest of many investors across the globe. Crypto trading and investing showed dramatic expansion in Indonesia.

·        To signify the acceptance of crypto in the country

Now more than ever, we are seeing countries and governments begin to take strong stands on crypto. Some are surprisingly welcoming; for instance, El Salvador made Bitcoin legal tender last year.

Other countries are surprisingly hostile toward cryptocurrencies. Earlier this year, the Tajdid Central Leadership Muhammadiyah issued a fatwa against cryptocurrency. They cited the price volatility as the reason for calling crypto “haram”.

Implementing taxes on crypto is a big step for Indonesia because it shows acceptance. Who knows, maybe soon they will accept crypto as a form of payment.

Is Crypto a commodity but not a currency In Indonesia?

Up until now, cryptocurrency assets though not allowed to be used as legal tender, have been regulated by the Indonesian trade ministry as commodities. The Indonesian government had previously urged NFTs owners to pay taxes according to a 2008 law.

The central bank, the Bank of Indonesia, and the Ministry of trade all define crypto as a commodity. However, they are not considered legal tender therefore they cannot be used as a means of payment.

According to government officials, Crypto-assets should be subject to VAT because they are a commodity according to the trade ministry. The government will impose income tax and VAT.

It was reported that the Indonesian government is still working on how to implement the regulation for these taxes. Other goods and services in Indonesia are subject to an 11% VAT rate. Therefore, the VAT rate on crypto-assets is notably lower than the rest. The income tax on capital gains however matches that on shares listed on the Indonesian stock exchange. 

How is this move related to last year’s overhaul bill?

According to officials, the move is in line with the wide-ranging tax law passed in Indonesia last year following her economic recovery from COVID-19. Last year, Indonesia passed a major tax overhaul bill which set the motion for this year’s VAT rise.

Late last year, the Indonesian parliament approved a very ambitious tax overhauls law. It included canceling a planned corporate tax cut, a new carbon levy, and raising VAT. The law was aimed at optimizing revenue collection and improving tax compliance.

The law called for the VAT rate on the sale of goods and services to be raised from 10% in 2021 to 11% in 2022 and then 12% by 2025.

How does the public feel about this move?

Generally, the tax move on cryptocurrency has been facing significant backlash from the community. Business groups continue to question the timing of the tax hikes, being that the economy is still recovering from the pandemic and can be seen as fragile.

There is a good chance that the VAT hike will erode the purchasing power of low-income earners who are sensitive to rising prices. People have claimed that the economy needs a fiscal stimulus rather than a VAT hike that will most likely hurt consumption.

Conclusion

Cryptocurrency continues to be a concerning topic for most governments, only now do they seem to be getting on board. Crypto taxation and regulations and taxation seem to be the order of the day with the like of India implementing a 30% crypto tax. What do you think this move means for the crypto ecosystem at large?