The New Era of Article 21 Income Tax: Understanding the Average Effective Rate (TER) Scheme

Starting January 1, 2024, the Indonesian government implemented a significant change in the calculation method for Article 21 Income Tax (PPh 21). This change is marked by the implementation of the Average Effective Rate (Tarif Efektif Rata-Rata or TER) scheme. The primary background for this policy is the complexity of the previous calculation scheme, which had approximately 400 withholding scenarios, often confusing taxpayers and creating administrative burdens. Through this new regulation, the government aims to provide ease and simplicity for taxpayers in calculating tax deductions in each tax period, without adding a new tax burden for employees.

Basic Concept of the TER Scheme

The TER scheme is not a new type of tax, but rather a new calculation method. Previously, monthly tax withholding (January–November) required employers to calculate annual net income minus Non-Taxable Income (PTKP) and then multiply it by the progressive rates of Article 17. Now, that process is summarized.

Effective Rate Categories (TER)

Monthly effective rates are grouped into three categories based on the taxpayer's PTKP status at the beginning of the tax year:

Category A (TER A)

Applied to taxpayers with status Unmarried with no dependents (TK/0), Unmarried with 1 dependent (TK/1), and Married with no dependents (K/0). Rates start from 0% for gross monthly income up to Rp5,400,000.

Category B (TER B)

Applied to status Unmarried with 2 dependents (TK/2), Unmarried with 3 dependents (TK/3), Married with 1 dependent (K/1), and Married with 2 dependents (K/2). Rates start from 0% for gross monthly income up to Rp6,200,000.

Category C (TER C)

Applied to status Married with 3 dependents (K/3). Rates start from 0% for gross monthly income up to Rp6,600,000.

Additionally, there is a Daily Effective Rate specifically applied to Non-Permanent Employees with gross daily income. If the daily income is up to Rp450,000, the rate is 0%. If it is above Rp450,000 up to Rp2,500,000, the rate is 0.5%.

Calculation Examples

1. Permanent Employee Illustration

Suppose Mr. R works at PT ABC with a status of married without dependents (K/0). His monthly salary is Rp10,000,000.

• PTKP Status: K/0 falls under Category A.
• January Calculation: Based on the TER Category A table, an income of Rp10,000,000 is subject to a 2% rate.
• PPh 21 January: Rp10,000,000 x 2% = Rp200,000.
• This calculation is performed continuously every month until November (assuming the salary remains constant).
• December Calculation: PT ABC will calculate the total annual income, deduct office costs (biaya jabatan), pension contributions, and PTKP, then apply the Article 17 rate (progressive rate). The difference between the annual tax and the total amount already withheld (Rp200,000 x 11 months) is the tax payable in December.

2. Non-Permanent Employee Illustration

Mr. K works daily assembly jobs for 20 days in January with a wage of Rp500,000 per day.

• Since the daily wage (Rp500,000) is between Rp450,000 and Rp2,500,000, it is subject to the Daily TER of 0.5%.
• PPh 21 per day: Rp500,000 x 0.5% = Rp2,500.
• Total PPh 21 for January: 20 days x Rp2,500 = Rp50,000.

Conclusion

The TER scheme provides certainty and ease for tax withholders in carrying out monthly administrative obligations. By simply multiplying gross income by the table rate, calculation errors can be minimized. However, it is important to remember that TER is merely an installment tool; the actual tax fairness remains calculated progressively at the end of the tax year.

Regulatory References:

• Law Number 7 of 2021 concerning Harmonization of Tax Regulations (UU HPP).
• Government Regulation Number 58 of 2023 concerning Article 21 Income Tax Withholding Rates on Income in Connection with Work, Services, or Activities of Individual Taxpayers.
• Minister of Finance Regulation Number 168 of 2023 concerning Implementing Guidelines for Withholding Tax on Income in Connection with Work, Services, or Activities of Individual Taxpayers.