Implementation of TER PPh 21: Opportunities and Challenges for Individual Taxpayers

Tax reform continues to progress in order to enhance the effectiveness and efficiency of tax collection. One policy implemented as part of this tax reform is the use of the Average Effective Rate (TER) for Article 21 Income Tax for permanent employees.

This policy aims to simplify tax calculations for employers and reduce administrative burdens. However, in its implementation, the TER policy has instead created ambiguities among individual taxpayers, particularly regarding the overpayment status on their tax withholding slips.

The imposition of income tax on individual taxpayers is regulated under Law No. 7 of 1983 on Income Tax, as amended several times, most recently by Law No. 7 of 2021 on Harmonisation of Tax Regulations. Under these provisions, the progressive income tax rates for individuals are set out in Article 17 of the Income Tax Law, which forms the basis for calculating the annual tax liability.

Meanwhile, the policy on using TER for withholding Article 21 Income Tax is further regulated by Government Regulation No. 58 of 2023 on the Withholding Tax Rate for Article 21 Income Tax on Income Related to Employment. This regulation is then implemented technically through Ministry of Finance Regulation No. 168 of 2023 on Guidelines for Withholding Tax on Income Related to Employment.

Under the TER scheme, employers no longer calculate tax monthly using the progressive rates as provided in Article 17 of the Income Tax Law. Instead, tax withholding is carried out using an effective rate determined based on the monthly gross income brackets of employees. This approach is intended to simplify the tax withholding process throughout the tax year.

Nevertheless, in practice, issues arise during the year-end tax recalculation. Based on the applicable provisions, tax withholding for the tax periods from January to November uses the TER scheme, while for the December tax period, employers are required to make adjustments by recalculating the tax liability using the progressive rates as set out in Article 17 of the Income Tax Law.

This adjustment creates a situation where the amount of tax withheld from January to November turns out to be greater than the tax that should actually be due based on the annual calculation. As a result, an “overpayment” status appears on the Article 21 Income Tax withholding slip issued by the employer.

This phenomenon creates a perception among taxpayers that they have an excess tax payment that can be claimed as a refund from the Directorate General of Taxes. In fact, technically, this excess withholding is not an overpayment in the context of the relationship between the taxpayer and the tax authority, but rather a withholding difference in the relationship between the employee and the employer as the tax withholder.

If the employer had consistently used the progressive rate calculation under Article 17 of the Income Tax Law each month from the beginning, this excess withholding situation would not occur. However, because the TER scheme uses a monthly rate simplification approach, the potential difference between monthly withholdings and the annual tax liability becomes unavoidable.

Another issue that arises concerns the new format of the Article 21 Income Tax withholding slip following the implementation of the coretax system. When tax withholding is carried out using the TER scheme, the new withholding slip format will highlight the “overpayment” status, causing confusion among many taxpayers regarding their Annual Tax Return (SPT) status.

Not a few taxpayers then assume that they must report their Annual Tax Return with an overpayment status to the tax authority. In reality, in many cases, the reporting that should be done remains an Annual Tax Return with a nil status, because this withholding difference does not directly relate to the taxpayer’s annual tax obligation to the state.

The mechanism for resolving excess withholdings actually lies in the realm of the relationship between the employee and the employer. Taxpayers experiencing excess withholdings can file a claim with their employer as the Article 21 Income Tax withholder.

Subsequently, the employer can offset this excess withholding in the Monthly Tax Return for Article 21 Income Tax in the following tax period. Thus, the excess tax withholding is not processed through the refund mechanism to the tax authority, but through administrative adjustments at the withholder level. Proper understanding of this mechanism is important to avoid errors in reporting the Annual Tax Return by individual taxpayers.

Considering the various dynamics that have occurred, the implementation of the TER policy still requires adequate socialisation and education to stakeholders, both employers and taxpayers. Without sufficient understanding, a policy initially designed to facilitate tax administration could instead cause confusion in its execution.

In conclusion, policy dissemination is a key factor in ensuring the effectiveness and efficiency of public policy implementation. With good socialisation and education, the implementation of public policies is expected to increase compliance and strengthen taxpayers’ trust in the tax system.