In a landmark policy shift, the Indonesian government is preparing to make the 0.5% final income tax rate for micro, small, and medium enterprises (MSMEs) permanent. The move aims to provide long-term certainty for millions of small business owners, especially amid economic pressures and the need to maintain healthy cash flow. By revising Government Regulation No. 55/2022, the state signals its commitment to inclusive taxation and formal sector expansion.
Key Facts & Background
- The government is revising Government Regulation (PP) No. 55/2022 to make the 0.5% final income tax (PPh final) rate permanent for:
- Individual MSMEs (Orang Pribadi/OP)
- Sole proprietorships (Perseroan Perorangan)
- The revision also proposes extending the 0.5% PPh final rate for cooperatives until tax year 2029.
- Under the current regulation:
- Individuals can use the 0.5% rate for 7 years
- Cooperatives, CVs, firms, village-owned enterprises, and sole proprietorships: 4 years
- Limited liability companies (PTs): 3 years
- Without revision, many MSMEs would lose access to the 0.5% rate starting in 2025, despite its introduction in 2018.
- The policy is part of broader efforts to:
- Ease tax burdens
- Encourage formalization
- Improve compliance among small businesses
- The government emphasizes that the revision is essential to support MSMEs’ resilience and stimulate long-term economic inclusion.
Strategic Insights
The decision to make the 0.5% final income tax rate permanent for MSMEs marks a pivotal evolution in Indonesia’s fiscal architecture. It reflects a shift from temporary stimulus to structural support, recognizing that MSMEs are not just recovery agents but permanent pillars of the national economy.
By removing the time-bound limitations of PP 55/2022, the government is addressing a critical pain point: uncertainty in tax planning for small entrepreneurs. The original sunset clauses—ranging from 3 to 7 years—created ambiguity and discouraged long-term investment or formal registration. A permanent rate offers predictability, which is essential for financial planning, credit access, and business scaling.
This move also strengthens Indonesia’s push toward broadening the tax base without overburdening the informal sector. With over 60 million MSMEs contributing to more than 60% of GDP and employing the majority of the workforce, integrating them into the formal tax system is both an economic and governance imperative. A low, flat rate simplifies compliance and reduces administrative friction, making it easier for businesses to transition from informal to formal status.
Moreover, the policy aligns with global best practices in progressive taxation and inclusive growth. Countries that have successfully expanded their tax base—such as Brazil and South Korea—have done so by offering low-rate, high-compliance regimes for microenterprises. Indonesia’s approach mirrors this logic, balancing revenue mobilization with equity and ease of doing business.