Fintech companies racing against the clock to fulfill Indonesia's VAT deadline for digital wallets

According to Indonesian tax specialists, several financial technology (fintech) firms are still scrambling to get their systems and procedures in place to begin charging VAT on digital wallet services on May 1.

Certain fintech firms are unprepared for the 11% VAT on digital wallet services, including crypto-assets and e-wallet services, which takes effect in May. VAT will be levied on service fees and commissions charged by service providers in addition to the nominal sum placed by clients or on value transactions.

“A leading fintech company has told us they are still preparing their systems, finalising discussions on how they will share the VAT revenue with the government and ultimately how it will affect their customers,” said a partner at a leading tax and accounting consultancy in Indonesia.

He said that other businesses were also finalizing conversations with the government about whether to register for VAT or continue charging clients for their services.

All fintech firms that offer digital wallet services, such as crypto-assets, payment gateways, e-wallets, peer-to-peer lending, and crowdfunding, must adhere to VAT regulations. The laws aim to equalize the playing field between established financial institutions such as banks and emerging digital service providers.

The fintech sector appears to be a victim of its own success, since the implementation of rules and VAT closely parallels the sector's growth.

Freddy Karyadi, a member of the Indonesia Fintech Association's Board of Ethics, stated that the Indonesian government has been imposing taxes on digital service providers for some time in order to increase tax income.

“However, in the past there were some grey areas in the law regulating fintech or e-money companies, and so, not all of them complied with the regulations including VAT payments,” said Karyadi. “A lot of companies just played the rules in order not to comply,” he added.

What changed was the passage of the Tax Regulation Harmonisation Law (HPP Law) in 2021, which added financial services to the list of taxable sectors. This was also in response to legislation imposing fees on electronic service providers such as Facebook, Google, and Amazon.

According to Ahdianto Ah, tax partner at GNV Consulting in Indonesia, the VAT restrictions on digital wallet services are part of the government's larger effort to harmonize the country's tax laws, which includes imposing a VAT duty on fintech businesses.

While some businesses are frantically trying to fulfill the VAT deadline, others are well prepared.

Widjayanto Djaenudin, chief operating officer of LinkAja, stated that he did not anticipate the VAT legislation to have a significant impact on his business because the firm has been charging VAT on its fees from its inception in 2019.

These sentiments are shared by OVO, Indonesia's biggest fintech business, which had already implemented VAT on its transaction costs prior to the government's declaration.

Application of VAT and the future

According to certain tax specialists, the VAT requirements effect businesses differently, despite the fact that they apply to all fees and commissions associated with digital wallet services.

Wawan Hartono, managing partner of Taxprime Tax Consulting, predicted that the implementation of VAT would vary according to an organization's size, with larger businesses bearing the VAT fee and growth-stage businesses delivering services for free.

“The market for e-money providers is very competitive and the question now is once these regulations come into effect whether the providers will pass on the VAT charge to consumers or whether it will be borne by them,” said Ah.

Nonetheless, several organizations appear to be reevaluating their approach in light of the fintech market's strong competition.

According to a major tax adviser who requested anonymity to talk with ITR, businesses will be cognizant of their customers' financial situations and will look to see whether part of these expenses may be absorbed or offset by income from other business efforts.

As the government navigates the economy through the twin problems of the COVID-19 epidemic and inflation, tax specialists anticipate that the government will continue to explore for new income streams through the burgeoning fintech industry.

By fLEXI tEAM