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Business cries foul over plans for Indonesia e-commerce tax

Plan to spare social media from proposed levy 'will hit online marketplaces'

Resi Fahma sells homemade blackboards on Indonesian online marketplaces. (Courtesy of Resi Fahma)

JAKARTA -- Resi Fahma, a young mother from the West Java city of Depok, relied on Instagram posts to generate sales when she launched a business selling homemade blackboards in 2015. Initially, business was slow, but sales almost doubled after she placed her products on three of Indonesia's leading online marketplace platforms, Tokopedia, Bukalapak and Shopee.

Such platforms now account for up to 80% of Resi's sales. But as the government prepares to start taxing online shopping, she is having to consider reverting to selling via social media.

While no details of the plan have been revealed, Finance Minister Sri Mulyani has said it aims to establish a more level playing field between businesses that operate online and those offline, which must add 10% Value Added Tax to the price of goods purchased. The proposed tax rate for e-commerce transactions remains unknown, but the minister has promised that it will be lower than the offline rate.

Small clothing factories like this one in Bogor, West Java have been finding customers via online marketplace Tokopedia. (Photo by Ardi Wirdana)

It is understood that the tax is likely to cover both Ebay-style online marketplaces, which act as matchmakers between buyers and sellers, and sellers that largely acquire items for sale from third parties. However, the tax would not be levied on sales through social media networks, a popular sales route in Indonesia, or on websites selling goods on behalf of single companies.

Resi said that the tax would not make her abandon online shopping sites, but could prompt customers to buy through social media instead, getting the same products for a lower, tax-free price.

Moving to social media for sales transactions "is a possibility, particularly for loyal customers," said Resi. She uses Instagram to post pictures of her products and communicate with her customers, who then make their purchases through bank transfers.

According to marketplace operators, Resi will be one of millions of sellers who will shift their online commerce activities to social media if the tax goes ahead as planned.

'Exodus' of sellers

"If the tax regulation restricts e-commerce platforms -- making selling in Bukalapak complicated because of the tax -- there will be an exodus of people who would prefer selling on Instagram and Facebook, which is uncontrolled and not chased for tax because they sell through the back door," Bukalapak co-founder and chief financial officer Muhamad Fajrin Rasyid told local media.

This would be a big blow to the online shopping industry, which has flourished in the last few years, attracting substantial foreign investment. Tokopedia earlier this year received a $1.1 billion investment from Chinese internet giant Alibaba Group Holding.

This came only months after a group of investors, including Taiwan insurance company Cathay Financial Holding and global investment company Hillhouse Capital, invested $550 million in Singapore's Shopee, most of it earmarked for operations in Indonesia.

The level of investment in Indonesian e-commerce reflects the perceived potential of the industry, driven by high smartphone and internet penetration, which will reach total annual transactions of $81 billion by 2025 (including social media sales), according to Google.

The Indonesian E-commerce Association said the government must find a way to tax social media transactions, to maintain fairness. According to a survey by the association, 60% of e-commerce sellers operate through social media and other websites, compared with 40% using marketplace sites.

Suryadin Laoddang, an internet marketing consultant, said Indonesians' attachment to social commerce reflects familiarity with social media, which was in widespread use before online marketplaces appeared, as well as the generally social nature of the population.

"Indonesians are people of interaction, social people. For example, if we put a product on social media like Facebook, they would still ask about things like how much the price is, what the color is," he said.

However, online shopping sites have moved to close the gap on social media over the last few years, Suryadin said. A tax imposed on online shopping sites could therefore be a blow to their development.

Revenue shortage

This poses a dilemma for the government, which does not want to disrupt the growth of e-commerce, but is also in urgent need of revenue to fund ambitious infrastructure projects.

According to the Center for Indonesia Taxation Analysis, the annual value of e-commerce transactions is between 150 trillion rupiah ($11.1 billion) and 200 trillion rupiah. Applying the 10% VAT rate to the sector would bring in up to 20 trillion rupiah in additional revenues.

The tax office initially said that the regulation would be finalized and announced in mid-October, but strong objections by e-commerce players have led to prolonged internal debate.

If the government decides to appease e-commerce players and levy tax on other forms of online commerce, such as social media and company-specific shopping websites, this will produce complaints from small businesses, which are increasingly shifting to online marketing to boost sales.

Hermawati Setyorinny, chairwoman of the Micro, Small and Medium Enterprises and Industries Association, said she is confused by the government's policy towards small businesses, noting that it had recently appeared committed to encouraging digitization by providing free training and website assistance.

However, just as smaller businesses were starting to become familiar with e-commerce, the government was planning a policy that will hamper their growth. "They want to help, but then they also want to have their share. So what is their position?" she said.

Hermawati stressed that smaller businesses were not ready for taxation of their online transactions. However, she asked for differential treatment for smaller businesses if the tax goes ahead.

"There needs to be criteria for who gets taxed, such as businesses with a certain amount of income. What is the point of categorizing businesses as micro, small and medium if they are all treated the same?" she said.

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