The construction sector plays an important role in national development. Data from Statistics Indonesia shows that the construction sector contributes 10.43% to GDP. The construction sector also plays a direct strategic role in job creation and national infrastructure development. Construction businesses also have unique characteristics in terms of tax compliance, given that projects can also be carried out by subcontractors or contractors.
Construction business taxes are generally regulated in Article 4 paragraph 2 of the Income Tax Law. The Government Regulation Number 9 of 2022 article 3 regulates several income tax rates in accordance with the scale of business ownership of a construction service business license (SIUJK). The following is an explanation of the final income tax rates based on the following classifications:
- Construction work carried out by service providers who have a small business certification (SBU) or a work competency certificate (SKK) for individual businesses is subject to 1.75%.
- Construction work carried out by service providers who do not have an SBU or SKK for individual businesses is subject to 4%.
- Construction work carried out by service providers other than those mentioned in points a and b is subject to 2.65%.
- Integrated construction work carried out by service providers with SBU is subject to 2.65%.
- Integrated construction work carried out by service providers without SBU is subject to 4%.
- Construction consulting services performed by service providers that have an SBU or SKK for individual businesses are subject to 3.5%.
- Construction consulting services performed by service providers that do not have an SBU or SKK for individuals are subject to 6%.
In addition to income tax, construction services are also subject to value added tax at a rate of 12% of 11/12 x contract value.
In practice, subcontractors often refuse tax deductions because they consider them to reduce their profits. This causes the income tax to be borne by the contracting company, thereby increasing costs and eroding profits. In response to this situation, many contracting companies resort to manipulative practices by renegotiating contracts. Renegotiating contracts can cause contracting companies to violate regulations and incur tax penalties. Meanwhile, companies that comply with tax regulations will raise their prices in order to maintain profitability, which leads to unfair and unhealthy competition among contractors. Therefore, the government, as the regulator, needs to establish a wise and consistent strategy to protect the construction business from such unfair competition. Policies can be implemented through incentives in the management of SIUJK and small-scale projects officially. From the subcontractor’s side, there must be a causal contract that regulates tax deduction obligations so that the contractor company does not bear the tax from the subcontractor company.
By Olina Rizki Arizal – Partner
TBrights is a tax consultant in Indonesia that is currently an Integrated Business Service in Indonesia that can provide comprehensive tax and business services.
Reference:
- The Government Regulation Number 9 of 2022 concerning the Second Amendment to Government Regulation Number 51 of 2008 concerning Income Tax on Income from Construction Services.
