Navigating Article 21 Income Tax Rates: Between Article 17 and TER Schemes

In tax administration in Indonesia, specifically Income Tax Article 21 (PPh 21), understanding rates is key to compliance. Since the enactment of derivative regulations from the Harmonization of Tax Regulations Law (HPP Law), the PPh 21 calculation mechanism has undergone significant transformation. Now, tax withholders generally rely on two main schemes: the General Rate (Article 17) and the Average Effective Rate (TER).

Understanding when to use the correct rate is crucial to avoiding calculation errors that lead to underpayment or overpayment. Here is a breakdown of these rate categories.

1. Article 17 Paragraph (1) Letter a of the Income Tax Law (Progressive Rate)

This is the "classic" progressive rate, meaning the higher the income, the higher the tax percentage. This rate is applied to Taxable Income (PKP).

The rate layers are as follows:

• 5% for income up to Rp60 million.
• 15% for income above Rp60 million to Rp250 million.
• 25% for income above Rp250 million to Rp500 million.
• 30% for income above Rp500 million to Rp5 billion.
• 35% for income above Rp5 billion.

When is this Rate Used?

Under the new regulations (PP 58/2023), this progressive rate is used at specific moments, including:

• Last Tax Period for Permanent Employees: To calculate the final annual tax (usually in December), companies must calculate the total annual income minus Non-Taxable Income (PTKP), then multiply by this Article 17 rate. The result is reduced by the tax already paid using TER from January to November.
• Non-Employees (Experts): For lawyers, doctors, or consultants, this rate is multiplied by 50% of the gross income.
• Activity Participants: Prizes or honoraria for activity participants are multiplied directly by this rate.

2. Average Effective Rate (TER)

To simplify monthly withholding, the government introduced TER. This is not a new tax, but a concise method for calculating tax installments. The TER rate is multiplied directly by Gross Income (without deducting office costs/pension or PTKP first). TER is divided into two types:

A. Monthly Effective Rate

This rate is used for Permanent Employees (every tax period except the last one), Pensioners, and Commissioners/Supervisory Board members receiving irregular remuneration. The rate depends on the PTKP category:

B. Daily Effective Rate

This rate is specifically used for Non-Permanent Employees (casual/daily workers) who receive daily, weekly, unit, or piece-rate wages.

• If gross daily income is up to Rp450,000: Rate is 0%.
• If gross daily income is > Rp450,000 to Rp2,500,000: Rate is 0.5%.

Conclusion

PPh 21 withholding now uses a hybrid approach: TER for ease of monthly/daily administration, and Article 17 Rate for fairness in year-end calculations or for non-employees. Ensuring the correct income recipient category and PTKP status is the mandatory first step for employers to determine which rate applies.

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.