Today, businesses with annual revenue of less than Rp 4.8 billion ($340,000) pay a 1 percent tax on their total sales. Other businesses pay 25 percent of their profit as income tax and set aside 10 percent of sales for value added tax.

While the current arrangement only demands simple accounting, small and medium-sized enterprises say it also means they have to pay income tax when they are at loss, which disrupts their cash flow.

"The new regulation is intended to encourage SMEs to be more active in economic activities by providing a fairer taxpaying scheme," Directorate General of Taxation spokesman Hestu Yoga Saksama said in a statement.

To lower their tax bill, SMEs must file an application to the tax office. Individual taxpayers can enjoy the lower tax rate for seven years, corporate taxpayers for four years and limited liability companies for three years.

"The cut from 1 percent to 0.5 percent is expected to facilitate SMEs in maintaining their cash flow, which can then be used as additional capital for their businesses," said Yustinus Prastowo, executive director at think tank Center for Indonesia Taxation Analysis.

The cut will cost the government around Rp 2.5 trillion a year, which according to Yustinus should be seen as an investment, as the policy is expected to increase the tax base.

Tax office data show that tax revenue from SMEs last year amounted to Rp 106.3 trillion — only 60 percent of the government's target. It was also nearly Rp 12 trillion lower than in the previous year.

Source: http://jakartaglobe.id/business/govt-cuts-tax-small-medium-enterprises/