MSME Tax Overhaul May Slow Expansion, Hiring: Economists

MSME Tax Overhaul May Slow Expansion, Hiring: Economists

Jakarta. Economists have warned that the government’s decision to narrow eligibility for the 0.5% final income tax regime for micro, small, and medium enterprises (MSMEs) could raise operating costs for thousands of small businesses structured as limited partnerships (CV) and limited liability companies (PT), potentially affecting expansion plans and job creation.

Under Government Regulation (PP) No. 20/2026, the government has retained the 0.5% final income tax rate for MSMEs but restricted access to the facility. CVs, firms, non-individual PTs, and village-owned enterprises (BUMDes) are no longer eligible for the preferential tax scheme.

Head of Research at the Center for Indonesia Taxation Analysis Fajry Akbar said the policy is intended to curb the practice of firm splitting, in which larger businesses divide operations into smaller entities to qualify for MSME tax incentives. However, he cautioned that the regulation could also affect genuinely small businesses that happen to operate as CVs or conventional PTs.

“Small businesses that operate as CVs or regular PTs will be affected by the new tax policy, even though they are not using firm-splitting schemes,” Fajry said.

Businesses that lose access to the 0.5% final tax regime will have to transition to the general tax system, which requires formal bookkeeping and financial reporting. Fajry said that this could significantly increase compliance costs, particularly for small enterprises with limited administrative capacity.

“If the burden becomes disproportionate, it could ultimately affect the sustainability of MSMEs,” he said.

Fajry added that the timing of the policy warrants careful consideration, as businesses are already grappling with slower economic growth and elevated global uncertainty.

While the tax rate itself remains unchanged, businesses previously benefiting from the final tax regime could face higher effective tax obligations under the new system.

“An increase in the tax burden under current conditions will undoubtedly weigh on businesses. Whenever taxes rise, companies will have to recalculate their plans,” he said.

Higher costs could discourage business expansion, prompting firms to delay investment and hiring. “If the expected return is no longer attractive, businesses will hold back, and one consequence could be slower job creation,” Fajry said.

A similar concern was raised by Nailul Huda, Director of Digital Economy at the Center of Economic and Law Studies (Celios). He argued that the regulation could create unintended consequences.

“I think many businesses will eventually split into individual PTs by dividing their operations, as they have done before. This could make business data even more difficult to track,” Huda said.

The government has said the policy aims to ensure tax incentives are better targeted and to prevent misuse by larger businesses that artificially divide their operations into multiple smaller entities.

Under the new regulation, the 0.5% final income tax remains available to eligible MSMEs with annual revenue of up to Rp 4.8 billion, while the first Rp 500 million in annual revenue earned by individual taxpayers remains exempt from income tax.

The Directorate General of Taxes said individual taxpayers and individual PTs may continue using the 0.5% tax scheme indefinitely, while cooperatives can access the facility for four years after registration. The policy is intended to better target tax incentives and prevent abuse through practices such as firm splitting.

Businesses such as PTs and CVs that transition out of the final tax regime will instead be taxed based on net profit after deducting operational expenses rather than gross revenue. The government has also pledged a transition period and assistance to help affected businesses adapt.

“The government wants to be present not only as a regulator but also as a partner accompanying businesses throughout their journey. We want to ensure our MSMEs transform into stronger, more independent, and more competitive enterprises,” Director General of Taxes Bimo Wijayanto said.

Tags: Keywords: