New tax will apply to construction, consulting services

JAKARTA (JP): The government has introduced a ruling to impose project-based final rates of income tax on construction and consulting services, Director General of Taxes Fuad Bawazier announced yesterday.

Under the ruling, companies and individuals will not be taxed a second time on this income according to progressive corporate tax rates of between 15 percent and 30 percent.

Fuad said the new rules on project-based income taxes were stipulated in Government Regulation No. 73/1996, dated Dec. 20. The ruling will come into force on Jan. 1, 1997.

The ruling stipulates that 2 percent final income taxes will be imposed on contractors and 4 percent on architects and project managers for public and private projects.

The 2 percent income tax applies to both individual and corporate taxpayers. The 4 percent income tax only applies to companies.

The government now imposes a 1.5 percent income tax on all construction services. On public projects, it already applies the new tax system stipulated in the ruling.

Fuad said the new tax ruling addressed problems faced by contractors, architects and project management firms in calculating their tax.

The new ruling stipulates that a 4 percent final income tax will be imposed on all consulting firms, except law firms and tax consultants.

The new ruling states that the stipulated income tax rates are derived from the gross value of projects.

The government now imposes a 6 percent income tax on consulting services.

Fuad said that cutting consulting firms' income taxes would improve the competitiveness of local consulting firms amid globalization.

The final tax system requires building companies to pay their taxes immediately upon receiving their contracts. The tax payment is final, meaning they are not required to state their income from construction in their annual tax returns.

Under the present system, contractors are allowed to ask for a refund if they suffer losses, but if their profits exceed 20 percent they must pay more income tax.

Daniel Hutapea, the chairman of the building companies' association, hailed the government's decision to replace the tax system on construction.

He acknowledged that the present tax system, in which payments were mainly based on contractors' book keeping, was often problematic because most contractors' book keeping was disorganized.

"We often win only one project in a year, sometimes even one in three years so it is difficult for us to maintain good book keeping," he said, adding that many construction companies did not have accounting staff.

Daniel said that construction companies, which must be mobile and pay many bribes, often had trouble asking for tax refunds when they lost money.

"We never get invoices for the payment of illegal levies. So it is difficult for us to ask for tax refunds," he said. (rid)