Corporate Income Tax

Corporate Income Tax (CIT) - Understanding Company Tax Obligations

Corporate Income Tax (CIT), or Pajak Penghasilan (PPh) Badan, is a tax imposed on the income or profit obtained by a business entity (badan usaha) within one tax year. Unlike Personal Income Tax (PIT) (PPh Orang Pribadi) which is levied on an individual's salary or earnings, CIT is specifically directed at business entities such as Limited Liability Companies (PT), Commanditaire Vennootschaps (CV), State-Owned Enterprises (BUMN), foundations, and cooperatives.
 

CIT Calculation Mechanism

Calculating CIT is more than just multiplying the net profit by the tax rate. Several crucial stages must be followed, known as fiscal reconciliation (rekonsiliasi fiskal), to ensure that the tax calculation adheres to tax regulations, not just commercial accounting standards.

1. Gross Income (Penghasilan Bruto)

This is the initial step where the company compiles all revenues received in one tax year. Gross Income includes:

• Business Income: Revenue from the sale of products or services.

• Non-Business Income: Income from deposit interest, asset rentals, or gains from the sale of fixed assets.

• Foreign Exchange Gains: Profits earned from fluctuations in currency exchange rates.

2. Deductible Expenses (Fiscal Expenses) (Biaya Pengurang Penghasilan Bruto / Biaya Fiskal)

After obtaining the total income, the company can subtract expenses permitted by tax law. These are called "fiscal expenses" and differ from commercial accounting expenses. Examples of deductible expenses include:

• Operational Costs: Salaries, rent, electricity, and administrative costs.

• Depreciation and Amortization: Reduction in the value of fixed and intangible assets.

• Pension Fund Contributions: Contributions paid to pension funds approved by the Minister of Finance.

Important: Some costs are non-deductible (non-deductible expense) in the tax calculation, such as donations, food and beverage costs in the workplace that are not considered office facilities, and income tax that has already been paid.

3. Taxable Income (TI) (Penghasilan Kena Pajak / PKP)

After Gross Income is reduced by all fiscal expenses, the result is the Fiscal Net Income (Penghasilan Neto Fiskal). This figure becomes the basis for the tax calculation. If the company has tax losses carried forward (kerugian) from previous years (a maximum of 5 years), these losses can be offset to reduce the Fiscal Net Income. The final result is the Taxable Income (TI).

4. Tax Payable (PPh Terutang)

The TI is then multiplied by the applicable CIT rate (tarif PPh Badan). Since 2022, the general CIT rate in Indonesia is 22%.

• Simple Formula:

  Tax Payable=Taxable Income×22%

  There are also tax incentives for companies with a gross annual turnover below IDR 50 billion, which receive a 50% rate reduction on a portion of their income.

5. Tax Credit (Kredit Pajak)

Before depositing the tax, the company can credit or reduce the tax that has been prepaid or withheld by other parties. Examples include:

• Article 22 Income Tax (PPh Pasal 22): Tax withheld by government treasurers when the company transacts with the government.

• Article 23 Income Tax (PPh Pasal 23): Tax withheld by other parties on income from rent, royalties, or services.

• Article 25 Income Tax Installments (Angsuran PPh Pasal 25): Tax payments paid in monthly installments by the company.

Reporting Obligation: Annual Corporate Income Tax Return (SPT)

Every company is obliged to submit the Annual Corporate Income Tax Return (CITR) (SPT Tahunan PPh Badan) no later than four months after the end of the tax year. This document summarizes all of the company's tax calculations, accompanied by financial statements (balance sheet and income statement) and an expense recapitulation. Reporting can now be done online through the e-Filing system provided by the Directorate General of Taxation.

Impact of Compliance and Sanctions

Compliance in paying and reporting CIT is key to maintaining a company's legality and credibility. Tax-compliant companies will have a good record with the government and potential business partners. Conversely, late payment or non-compliance can result in:

• Fines/Penalties (Denda): For late submission of the SPT.

• Interest (Bunga): For underpayment of tax.

• Criminal Sanctions (Sanksi pidana): If intentional tax evasion is proven.

Understanding and managing CIT is an inseparable part of sound and sustainable financial management for every company.