Amazon, Google Face Tax Test as Indonesia Reins In E-Commerce
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Traditional members of Indonesia’s Baduy tribe shun footwear and live in woven bamboo houses without electricity, harvesting honey from natural beehives and weaving intricate traditional fabrics by hand. Some younger members then sell the stuff on Instagram.
“My wife weaves the fabric, while the honey bottles are supplied by friends,” said Danif, 27, who goes outside the tribal area to recharge his smartphone at a kiosk for 2,000 rupiah (14 cents). Some Baduy people, particularly those from the outer part of the tribal area, are more open to the outside world now and sell their products online, he said.
Whatever Danif’s business says about the youth of today, his embrace of online marketing speaks volumes about Indonesia’s booming e-commerce industry. The nation’s internet-based retail market expanded 80% last year, driven by a flood of imported goods, and the government is determined to try to control the millions of sales and get its share of tax. It’s a challenge many developing countries are trying to solve as cheap smartphones and a proliferation of courier companies make a world of goods available to increasingly affluent populations.
Indonesia is drafting a tax bill that will force local e-commerce startups and digital giants such as Google, Amazon and Netflix to collect and pay value-added tax. The bill, expected to be passed into law next year, will also set a legal basis for the government to impose income tax based on a company’s economic presence in Indonesia.
“There should be no dispute regarding the new VAT rule as companies abroad can just charge the tax to their customers and deposit it to us,” said Robert Pakpahan, tax director general at the Finance Ministry. The new rules will divide tax collection between a company’s headquarters and countries where consumption occurs, he said.
In August, Google announced that Google Ads accounts with billing addresses in Indonesia will be subject to 10% VAT starting in October to “comply with local tax regulations.”
Netflix declined to comment on the government plans, while Amazon didn’t respond to requests for comment.
Like most developing nations, Indonesia’s retail market was ripe for disruption, with trade largely carried out by small family stores strung out over some 6,000 inhabited islands with poor infrastructure on one side and a burgeoning smartphone-toting middle class, hungry for goods on the other.
Mobile subscriptions last year reached a staggering 133% of the population, according to official data – implying more than one phone for each of the nation’s 260 million population. By next year, almost a third of the country will be categorized as middle class, a group that accounts for over half of household spending.
That’s driving a surge in e-commerce, with the value of transactions soaring 80% to 146 trillion rupiah ($10.3 billion) last year, according to data from 14 players in the sector compiled by Bank Indonesia. The market could reach $65 billion by 2022, supporting up to 26 million full-time-equivalent jobs, says McKinsey & Co. Supporting that growth is a flood of foreign direct investment in transportation, warehousing and telecommunications.
Before the business becomes too big to control, Indonesia is introducing new regulations over the next year that will cover everything from electronic trading, to data collection, privacy, digital finance, cross-border transactions and tax. Its experience could provide lessons for other developing countries grappling with the global shift in the wholesale and retail of goods.
“We’re learning from China, which just passed its e-commerce law last year,” said Mira Tayyiba, an expert at the Coordinating Ministry for Economic Affairs. She said that one of the lessons is that, by the time China implemented its law, “the country now can’t do anything with Alibaba as it has become too big.”
President Joko Widodo, known as Jokowi, initially set a target in late 2016 to boost Indonesia’s e-commerce transactions to $130 billion by 2020, with a road map focusing on developing a “conducive ecosystem” for all players in funding, taxation, human resources and infrastructure.
That helped the business thrive -- the top three platforms in the country include two homegrown unicorns PT Tokopedia and PT Bukalapak.com, as well as Singapore-based Shopee. The online sites have been a boom for courier and delivery firms such as JNE, PT Sicepat Ekspres and J&T Express, as well as local ride-hailing company Go-Jek and its Singapore-based rival Grab.
But the boom encouraged a flood of cheap, imported goods, so the government has switched its focus to encouraging domestic producers, Tayyiba said.
“It would be useless for us to boost transactions if the main players are not locals, if the main products sold are not those produced domestically,” Tayyiba said. Local producers account for less than 10% of online sales, she said.
The new laws will divide players into three categories: merchants, marketplaces and intermediaries. Marketplaces with traffic or transactions above a certain threshold will have to report their transactions data to help the government profile the industry, and big overseas participants that export a lot to Indonesia will be required to have a representative in the country, said Tayyiba.
Social media platforms such as Facebook will be treated as a marketplace if they “facilitate any electronic trading.” Google will be categorized as an “intermediary” that has nothing to do with transactions, however “it must comply with the electronic trading rule if it benefits, including from ads,” Tayyiba said. “It must pay the taxes.”
Taxes are at the heart of the new rules. “The realized taxation revenue today has yet to reflect Indonesia’s big potentials in terms of internet usage, e-commerce and population,” said Finance Minister Sri Mulyani Indrawati.
Indonesia has 45 million registered taxpayers, including companies, with only about a quarter of those actually paying tax for last year.
Collecting the taxes won’t be easy. The government announced in January that it would require all marketplaces and social media platforms to report the revenue and taxes of their online sellers, and all merchants to register their taxpayer or identity numbers. The policy was revoked on March 29, three days before its slated implementation date, following an outcry from the Indonesian E-Commerce Association over concerns it would deter small local businesses from using e-commerce platforms.
While the two sides argue over how to regulate the industry, all players agree that the potential – for both sales and government revenue – is huge.
That’s good news for Baduy tribesman Danif and the millions of other small producers in the country like him. Instead of the traditional barefoot journey 80 kilometers to Jakarta to sell goods on the streets of the capital, Danif now ships his wares by courier.
“Sometimes, a customer from Jakarta orders only one handmade bracelet,” he said. “It’s okay. I’ll just send it.”
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