Indonesia
Payroll Guide

Country Overview

With tropical beaches, imposing volcanoes and palm-tree edged long coastlines, Indonesia stays on top of most holiday lists. But is Indonesia’s potential restricted to being a picturesque vacation destination? Absolutely not! Growing consumer market, abundant resources, upgraded infrastructure, and most importantly, government support has revamped Indonesia as an attractive investment destination.

Indonesia, the largest country in Southeast Asia, is located between the continents of Asia and Australia, sharing borders with Malaysia. It stands as the world’s 4^th most populous nation and ranked 10^th globally in purchasing power parity. Currently, the nation is pursuing a 20-year development plan, that started in 2005. Previously it has taken effective measures to tackle unemployment, increased capability to master technology and science. Currently, it is running the last phase focusing on improved human capital of the country and strengthened economy in the global market. The country has shown great success in reducing poverty by bringing the poverty rate down to below 10% in 2019.

The country is already preparing with the new 20-year development plan effective from 2025, focusing on becoming a high-income economy by 2045. With its impressive achievements in poverty reduction and ongoing commitment to growth, Indonesia is well on its way to secure a prosperous future for its citizens and becoming a key player in the international arena.

Market Glimpse

Indonesia has a mixed economy and one of the world’s principal trade routes boasted with significant natural resource wealth. The nation’s industrial focus spans manufacturing, mining, and agriculture, with significant contributions from sectors like electric vehicle battery production and infrastructure development.

It is an emerging market economy with the help of its 20-year development plan. The GDP reached IDR20,892.4 trillion and the economy grew on an average by 5% in 2023. Despite challenges such as the 1997 Asian financial crisis and the recent COVID-19 pandemic, Indonesia has shown resilience, attracting substantial foreign investment, which reached IDR 328.9 trillion in the first quarter of 2023. As a member of the G20, Indonesia hosted the 2022 summit in Bali, emphasising global economic cooperation. The ambitious $32-billion megaproject Nusantara, the new capital, symbolises Indonesia’s forward-looking vision and commitment to sustainable growth. The World Bank’s Indonesia Economic Prospects report mentioned a steady growth of the economy of average 5.1% per year from 2024 to 2026.

In addition to robust economic growth and strategic industrial focus, the Ministry of Finance of Republic of Indonesia (‘Government’) has introduced amended regulation Nomor 2 of 2022 (Perpu No 2 Year 2022) on Job Creation (‘the Law’) replacing Nomor 11 Tahun on Job Creation, 2020 to simplify the business process and to overcome the challenges of complicated voluminous laws. The Law consolidates over 80 laws and 1,200 related articles into just 174 articles. The Government also introduced the Online Single Submission system (OSS), a streamlined licensing procedures for various sectors in order to offer a much simpler business licensing acquisition process.

The strategies to make business operations easy in Indonesia does not cease with Government’s effective macroeconomic policies and simplified business process. In addition to all these, the Government also offers a range of incentives to encourage foreign investors.

Along with all the upsides, there are a few pointers that need to be taken care of before setting up a new business.

Shifting from the broader economic landscape, let us delve into the intricacies of payroll management, a critical component for any thriving business. This e-book will guide through the essential aspects of payroll, ensuring compliance and efficiency in business operations.

Payroll Compliance Essentials

Several registrations are required for a Company to start their operations in Indonesia. The process will commence with finalisation of the company name, and it is mandatory to submit the application to the Directorate General of Legal Administration Affairs. Additionally, verification through the Legal Entity Information System is required to confirm that the name is not already in use. After completion of all the paperwork, the company is eligible to receive the Business Registration number through Online Single Submission (OSS) portal.

As the company begins its functions, it should adhere to the relevant employment, social security, and withholding tax regulations to ensure that the employees receive accurate compensation, and all statutory dues are deducted and remitted to relevant authorities in order to avoid non-compliance.

In the course of this e-book, the statutory details right from onboarding to offboarding of an employee will be discussed in depth and the links to relevant official sites are embedded below:

Onboarding Simplified

The onboarding process of the employees are regulated by the relevant labour laws to ensure that the employees are hired and placed on work as per the norms stipulated. It insists to have defined employment contract in place with information on all the necessary working conditions and other payroll factors in place for seamless payroll operations. The requirements with regard to Indonesian payroll have been provided for below

1. Employee Classification

Similar to defining an employment contract and getting a legally valid contract in place, it is also crucial to classify the employee type based on the Implementing Guideline on The Withholding of Tax on Income in Connection with Individual Work, Services, or Activities of Government Regulation Number 168 of 2023 (“Withholding Tax guidelines”) as the withholding tax handling will differ based on the following employee classification

2. Employment Contract

In Indonesia, Government Regulation (PP) 35 of 2021 on Fixed Term Employment Agreement, Outsourcing Working and Rest Hours and Employment Relationship Termination (“Labour law”) outline 2 types of employment contract

The employment contract should be in writing mentioning all the legal information. The mandatory information that should form part of a valid employment contract is stipulated by Labour law as provided under:

• Name & address of the company
• Name of the business’s industry
• Name, gender, age & address of the employee
• Designation of employee
• Venue of work
• Salary details & other entitlements
• Tenure of work (start and end date for PKWT)
• Place & date of expiry of the contract
• Signature of both parties
• Rights & obligation of employee & employer

3. Minimum Wages

Next significant criterion is to comply with the minimum wage norms stipulated under Law of the Republic of Indonesia Number 2 of 2022 (Perpu No 2 Year 2022) on Job Creation (“Job Creation Law”). This is basically to ensure that the employees are prevented from receiving wages less than the government standards.

The minimum wages in Indonesia ranges between IDR 2 million to IDR 4 million and is determined based on the province where the organisation operates.

4. Probation Period

For scrutinising the efficiency and capabilities of the employee, probation period serves as a tool. In Indonesia, Job Creation Law regulates the probation period. It is enforceable only on the Indefinite Term Employment Contracts and it must be explicitly agreed upon and stated in the contract for a period not exceeding 3 months.

In case of Fixed-Term Employment Contracts probation period is not applicable. Even if the employer mentions it on the contract, it has no legal validity.

Workplace Protocols

Compliance with employee’s working conditions as per law is again a pertinent factor after onboarding an employee. Job Creation Law outlines the working hours, overtime, break times, overtime wages and leaves eligibility criteria of an employee.

1. Working Hours

2. Overtime

Overtime wages are compulsory, and it is counted based on basic wage and fixed allowance.

For overtime work employees are entitled to extra pay.

3. Breaks

The period of rest and break is also important for the employees and the country has specific rules for this matter.

Note that the break time shall not be part of normal working hours.

4. Leaves Entitlement

Employees in Indonesia are entitled to leaves on religious and public holidays as mandated by the government.

Apart from religious and public holidays employees of Indonesia are also entitled to several other paid statutory leaves as provided below:

*Note – The employee must work 12 months consecutively to be eligible for annual leave. On termination of employment (including voluntarily resignation) employers can encash the unused annual leave.

**Note – This leave is applicable even for miscarriage.

***Note- Employers are required to pay compensation for sick leave as follows

• For first 4 months ,100 percent of the normal wage.
• For second four months, 75 percent.
• For third four months, 50 percent
• Subsequent months, 25 percent until employer terminates the employment.

The payment for the above leaves is based on the normal wage agreed as per the employment contract.

5. Event-based Compensation

Employer is obligated to offer a range of benefits and compensation to ensure security of the employees while they are at work. In Indonesia, Work Accident Insurance (JKK) is a mandatory social security scheme that employers contribute for every month and if employees are injured or down with illness due to the work environment, they can get monetary benefit or health service benefits or both from this fund. It is regulated by Number 82 of 2019 (82/2019) on Work Accident and Casualty Security Program Implementation.

For the details on benefits to be paid out in the above mentioned scenarios refer the regulation link.

Salary Essentials

1. Salary Components

In Indonesia, the Withholding Tax guidelines outlines the mandatory salary components. Follow the below table to understand different salary components that forms part of Gross salary in Indonesia payroll.

2. Payslip Components

The regulation does not stipulate any mandatory payslip components; however it is preferable to specify the components of Gross Salary and applicable deductions for transparency.

Decoding Deductions

Employers are obliged to make several mandatory deductions in the below form:

1. Withholding Taxes

Indonesia follows January to December tax year and mandates employers to withhold income tax from employees’ salaries on a monthly payroll frequency as provided in Withholding Tax guidelines (“PPh 21”). The administration of income tax in payroll is governed by the following authorities

Till tax year 2023 individuals were taxed based on Annual projection method considering annual projected salary after mandatory payroll deductions, annual tax slabs were applied as per the previous guideline PER-16/PJ/2016 provided by the relevant authority as stated above. This method considered residential status as key criteria to identify the tax rate and computation procedure.

However, there were numerous complexities encountered by individuals while applying the annual projection method, especially for employees working only for part of the year. Considering the challenges, Indonesian Government has recently implemented significant changes to individual taxation by shifting from an annual to a monthly taxation method to simplify the process.

The applicable monthly tax rates are provided for in NOMOR 58 TAHUN 2023 followed by the implementation guidelines NOMOR 168 TAHUN 2023 by the Ministry of Finance that elucidates the computation procedure and other criteria about the withholding rates for income related to work, services, or activities of individual taxpayers.

The guidelines insists that the taxes are to be computed in the below manner:

a. Monthly taxes: For period other than December / Termination, monthly effective rates are to be applied on gross salary (before any payroll deductions). Gross salary considers all the components provided in the Section “Salary Structure” of this e-book.

The revised rules to determine the monthly tax effective rates are based on employee’s residential status, employee type and PTKP status. The PTKP status of an employee is determined by DJP as at beginning of the tax year only.

b. Yearly taxes: On year-end or termination of an employee annual tax rates are applied on Net Taxable Salary as mentioned in the table below. To compute annual net taxable salary the below mentioned payroll deductions needs to be considered –

• Occupation Expenses/Position allowance of 5% on the total annual gross income up to a maximum of IDR 6.000.000 per annum.
• Penghasilan Tidak Kena Pajak (PTKP) based on marital status and dependent details.

Note: For Non-residents flat tax rate of 20% will apply both monthly and in year-end/on termination.

As mentioned previously in “Onboarding section” of the e-book the above steps pertain to tax withholding for Permanent employee category only, however for other employee categories the Withholding Tax guidelines provides a different procedure for tax handling.

Refer the regulation link for more information.

Reporting

Along with the regulations, the reporting of the tax return has also evolved. Now the returns must be submitted electronically through the new simplified application, e-Bupot 21/26 which is part of Directorate General of Tax’s online filing system, DJP Online. It also includes auto generated withholding evidence feature that serves as immediate reference for employees. This feature will not only reduce the employer burden to generate the certificates / forms through the government portal directly but will also help in review it with the data submitted by the taxpayers.

The obligation of an employer for payroll will be fulfilled only if the deductions made are remitted and reported on time without any delay. Below are the key dates to keep in mind to fulfil tax obligations on time –

Non-Compliance

The company should be vigilant when it comes to maintaining of compliance with income tax. Otherwise, for withholding tax the consequences will be grave:

2. Social Security

In Indonesia, the National Social Security System (Sistem Jaminan Sosial Nasional or “SJSN”) requires all employees, including expatriates working for more than 6 months, to participate, providing extensive coverage across different areas of social security. The administration of these programs is handled by two main organisations:

Employers play a crucial role in funding these contributions, guaranteeing extensive coverage for their employees. The structure and contributions of the scheme are outlined as follows:

a. BPJS Ketenagakerjaan (Manpower)

*Note – The rates are categorised based on industry risk level i.e., very low risk, low risk, moderate risk, high risk and very high risk as provided below:

b. BPJS Kesehatan (Health)

*Note – The minimum wage varies based on province in which the organisation is registered with BPJS authorities.

Reporting

Employers must use the Electronic Payment System (EPS) to submit employee contributions and report them to BPJS manpower authorities by the 15^th of the next month. Whereas the submission and reporting of BPJS healthcare contributions should be done by the 10th of the next month through E-DABU application.

Non-Compliance

For any late payment in the social security contribution, a 2% penalty is applied for each month of delay.

3. Minimum Take Home Pay

The employers are eligible to make some deductions on employee’s salary based on valid reasons. However, the government has specified the reasons and limitations to prevent employee exploitation. Knowing the legal deduction grounds and maximum caps is important to avoid non-compliance.

Article 63 to 65 of Government Regulation (PP) on Number 36 of 2021 on Wages clarifies the legal deductions of wages can be made for –

• Fine
• Indemnity
• Prepaid Wage
• Loan payment or loan instalment.
• Rent of house/properties owned by the company.

All the deductions should be in accordance with the work agreement and company regulations. The total amount of wage deduction must not exceed 50% of the net salary received by the employee.

Seamless Offboarding

Maintaining compliance in the offboarding process is equally important and the employers should not brush aside this part of the employment. Usually, the termination of employment occurs when an employee retires, resigns or get dismissed from the work for grave reasons.

The provision regarding the eligibility is governed by the Law of the Republic of Indonesia Number 2 of 2022 (Perpu No 2 Year 2022) on Job Creation While its taxability is provided by Government Regulation (PP) Tariff of Article 21 Income tax on Incomes in the Form of Severance Pay, Pension Benefit, Old-Age Allowance and Old Age Security Paid in Lump Sum.

As per the above regulations, upon termination of an employment contract, employees are eligible for termination payments in the form of –

1. Severance and Long service Pay; it is determined based on the length of service. The calculation of the pay will be mentioned below.
2. Compensation Pay, it comprises of the following
   • Unexpired and unused paid annual leave of the employee
   • Cost or expense incurred for travel by employee and his family members to the place of work that has not been reimbursed
   • Any other compensation agreed as per individual or organisation work agreements and collective work agreements.

To calculate the Severance Pay, refer to the table below:

The calculation of Long Service Pay is as follows:

Depending on the termination reason, the type and amount of termination pay out will vary as explained below:

1. Retirement

The employer may terminate the employment of the workers when they enter pensionable age of 58 years. The retiring employee is eligible for the following benefits –

• 75 times of applicable severance pay
• 1-time of applicable long service pay
• Compensation pay

2. Resignation

Employees intending to resign need to serve a notice period. It is usually 30 days in Indonesia; however, for employees in probation period it is 7 days only.

Resignation of employees on their own will get the following benefits –

• Compensation pay
• Separation payment, if provided by employment agreement or company regulation.

3. Dismissal

Employer or authority can terminate an employee due to intentional or negligent actions that cause damage, loss, or destruction to the employer’s property. In such cases the following benefits will be applicable –

Also note, severance pay is taxable for the employees at different slabs.

Conclusion

Indonesia offers a promising environment for businesses, with its supportive regulatory framework and ease of managing payroll being key highlights and the various incentives for businesses further enhance its appeal.
The ease of managing payroll can be ensured by investing in robust payroll systems, leveraging advanced technology, and maintaining a keen understanding of regulatory changes. The key of managing payroll in Indonesia lies in staying informed and implementing best practices. Along with the compliance, the overall efficiency and satisfaction of the workforce will enhance the effective management of Company.