Searching for MSMEs in the Tax Law
Every time tax rules for MSMEs change, debate almost always arises. The same thing happened when Government Regulation Number 20 of 2026 (PP 20/2026) was issued. Some people immediately read this rule as a sign that the government is no longer siding with Micro, Small, and Medium Enterprises (MSMEs). The cause is mainly because CVs, firms, and ordinary limited liability companies are no longer new recipients of the 0.5 percent Final Income Tax facility.
In fact, read more calmly, the issue is not that simple. PP 20/2026 does not abolish the MSME Final Income Tax. The rate remains 0.5 percent. The turnover limit also remains at Rp4.8 billion per year. What has changed is the government’s method of determining who still deserves to use the facility. The Directorate General of Taxes (DJP) has also stressed that the facility still exists, but its target has been clarified to be more on target.
This is where the old problem reappears: who exactly is meant by ‘MSMEs’ in taxation? In everyday conversation, MSMEs are often understood as small businesses, family businesses, home industries, stalls, shops, small producers, or growing businesses. However, in Income Tax (PPh), the term used so far is not ‘MSMEs’, but Taxpayers (WP) with a certain gross turnover. This difference in terms appears technical but can cause misunderstandings. The public uses economic language. Taxation uses administrative language.
The term ‘MSME tax’ is actually more of a popular term, not a formal term in the body of the Final Income Tax rules. Formally, since Government Regulation 46 of 2013, the regime’s name is Income Tax on income from business received or obtained by Taxpayers with a certain gross turnover. PP 46/2013 came into effect on 1 July 2013 and was later revoked by PP 23/2018. However, since 2013, this regime has become widely known as the ‘MSME tax’. The DJP itself in its education efforts once mentioned that the MSME tax has been known since the issuance of PP 46 of 2013.
Why is it called the MSME tax? Because in practice, this regime indeed targets business actors with a certain turnover who, in public discourse, are often associated with the MSME group. The rate at that time was 1 percent of turnover and was final. After PP 23/2018 was issued, the rate dropped to 0.5 percent. The DJP also used very explicit terms in public communications, for example, ‘MSME Final Income Tax’ or ‘the final income tax rate for MSMEs becomes 0.5 percent’. Since then, the term ‘MSME Final Income Tax’ has become increasingly attached. Media, consultants, academics, and taxpayers use the term because it is easier to understand than the formal term ‘Taxpayers with a certain gross turnover’.
The problem is, this popular term then brings communication consequences. When the rules change, the public feels the ‘MSME’ facility is being revoked. In fact, under tax law, what is regulated is not all MSMEs, but certain taxpayers who meet certain fiscal criteria. This is the root of the misunderstanding: ‘MSMEs’ is an economic and empowerment term, whereas ‘certain gross turnover’ is a fiscal term.
Definition of MSMEs
It needs to be straightened out: it is not that Indonesia does not have a definition of MSMEs at all. Government Regulation Number 7 of 2021 already regulates the criteria for Micro, Small, and Medium Enterprises. In that PP, MSMEs are grouped based on business capital or annual sales results. For annual sales results, a Micro Enterprise is a business with sales results of up to Rp2 billion, a Small Enterprise is more than Rp2 billion up to Rp15 billion, and a Medium Enterprise is more than Rp15 billion up to Rp50 billion. PP 7/2021 also opens space for ministries/institutions to use other criteria for specific purposes, such as turnover, net wealth, investment value, number of workers, incentives and disincentives, local content, or environmentally friendly technology.
This means, in economic law, the definition of MSMEs exists, and it is quite detailed. However, that definition exists within the regime of ease, protection, and empowerment of MSMEs. It does not automatically become the fiscal definition in the context of Income Tax. This is the important point. The 0.5 percent Final Income Tax regime was not built with the sentence ‘MSMEs are subject to Final Income Tax’. This regime was built with the category ‘Taxpayers with a certain gross turnover’. So, what is tested is not only whether a person calls themselves an MSME, but who the tax subject is, what their turnover is, what their business form is, what type of income it is, and whether there is a relationship with other businesses.
Why Was the MSME Definition from PP 7 Not Directly Used?
The question then is: if PP 7/2021 already has a definition of MSMEs, why did the Ministry of Finance and the DJP not directly use that definition for Final Income Tax? The answer is because the goals of empowerment policy and tax policy are not entirely the same. In empowerment policy, it is natural for the state to use a broader scope. The goal is so that more businesses can receive support: licensing, mentoring, financing, partnerships, market access, and procurement. Therefore, the annual sales result limit in PP 7/2021 can be up to Rp50 billion for Medium Enterprises. However, for the 0.5 percent Final Income Tax facility, the government uses a limit of Rp4.8 billion. If the entire MSME definition from PP 7/2021 were adopted raw, the scope of the tax facility would be much wider. This would certainly impact the revenue base, fairness among taxpayers, and the risk of facility misuse. In other words, the MSME definition for empowerment does not automatically fit as the definition for recipients of a tax facility.
Moreover, taxation operates in a self-assessment system. The measure used must be relatively easy for taxpayers to calculate themselves and easy for the tax administration to test. A turnover of Rp4.8 billion is easier to use as an administrative boundary than MSME status, which can involve many variables: business capital, assets, sales results, ownership relations, Business Identification Number (NIB), subsidiary status, and cross-ministerial data. That is why the tax regime chose a simpler path, namely using a fiscal proxy.
A Simple but Imperfect Proxy
A proxy is a substitute measure.