What is Tax? Definition, Types, Functions and Examples

Tax is a mandatory contribution to the state owed by individuals or entities that is coercive based on law, without receiving direct compensation and is used for state needs for the greatest prosperity of the people. Taxes are one source of state income.

Taxes are like state treasury money collected from the people. So, taxes are money that people and companies have to pay to the government. Later, the government will use the tax money to build roads, schools, hospitals and various other facilities for the good of us all.

Understanding Tax

Taxes are mandatory contributions that must be paid by the community to the state, which will later be used to finance various public needs, such as education, health and infrastructure.

Taxes in Indonesia have a very important function and role in the development and operation of the country. Taxes are mandatory contributions to the state that must be paid by citizens, both individuals and business entities, and are used to finance various public needs such as education, health and infrastructure. There are several types of taxes in Indonesia, including Income Tax (PPh), Value Added Tax (PPN), and Land and Building Tax (PBB). PPh is a tax imposed on individual, corporate and undivided inheritance income, VAT is imposed on the delivery of finished goods and services, while PBB is imposed on ownership or control of land and/or buildings.

The imposition, calculation, payment and reporting of taxes are all regulated in this law. Meanwhile, further provisions regarding types of taxes such as PPh, VAT and PBB are also regulated in separate laws. In its implementation, the Directorate General of Taxes (DJP) is responsible for collecting taxes and monitoring taxpayer compliance with applicable tax provisions.

All eligible individuals and companies must pay tax. The conditions can vary, depending on the type of tax. So, it is important for us to know and understand taxes so that we can comply with the rules properly and correctly.

Types of Taxes

There are various kinds of taxes, you know! There is income tax, which is a tax that must be paid from the money we earn, for example from salaries. Then there is also value added tax which is usually included in the price of the goods or services we buy. There is also land and building tax that must be paid by people who own land or houses.

Direct Taxes: Taxes whose economic burden cannot be transferred to other people, for example Income Tax (PPh).

Indirect Taxes: Taxes whose economic burden can be transferred to other people, for example Value Added Tax (VAT).

Central Tax: Taxes managed by the central government, for example PPh and VAT.

Local tax: Taxes managed by local governments, for example hotel tax and restaurant tax.

Central Tax

Income Tax (PPh): Tax imposed on individual, corporate and undivided inheritance income.

Value Added Tax (VAT): Tax imposed on the delivery of finished goods and services.

Sales Tax on Luxury Goods (PPnBM): Tax imposed on luxury goods.

Local tax

Land and Building Tax (PBB): Tax imposed on ownership or control of land and/or buildings.

Motor Vehicle Tax (PKB): Tax imposed on motor vehicle ownership.

Hotel Tax and Restaurant Tax: Tax imposed on business receipts from the provision of lodging services and the provision of catering services.

Tax Function

Budget Function (Budgetair): As a source of state revenue to finance state expenditure.

Setting Function (Regular): To regulate the economy, such as controlling inflation and reducing income inequality.

Distribution Function: To distribute income and wealth more evenly.

Stabilization Function: To maintain macroeconomic stability and encourage economic growth.

Tax Characteristics

Collected Based on Law (Legality): Taxes must be collected based on applicable laws.

Force (compulsion): Must pay with certain sanctions for those who do not comply.

Not Getting Direct Rewards: Taxpayers do not get certain services or goods as direct compensation for paying taxes.

For Public Interest: The proceeds from tax collections are used to finance public needs and interests.

In practice, the Directorate General of Taxes (DJP) as part of the Ministry of Finance of the Republic of Indonesia is responsible for collecting these taxes and supervising the implementation and compliance with existing tax provisions.

All taxpayers, both individuals and entities, are obliged to comply with the tax provisions stipulated in these laws and regulations and pay taxes in accordance with the applicable provisions. Meanwhile, the government has an obligation to use tax revenues for state needs and public welfare.

Apart from that, there are also regional taxes such as hotel tax and restaurant tax which are imposed on business revenues from providing lodging services and providing catering services. Tax regulations in Indonesia are regulated in several laws and other regulations. For example, Law no. 6 of 1983 concerning General Provisions and Tax Procedures (KUP) is the legal basis that regulates general provisions and tax procedures in Indonesia, which has been amended by Law no. 16 of 2009.

Benefits from Taxes

The benefits of taxes are extensive, from government funding, reducing inequality, to encouraging positive behavior. Taxes also provide governments with a means to influence consumption and investment levels, which in turn can impact a country's economic stability and growth. With this understanding, it is hoped that the public can appreciate the role of taxes in helping to achieve the progress and prosperity of the Indonesian nation.

Government Funding: Taxes are the main source of income for the government to finance development activities and projects.

Reducing Inequalities: Through a progressive tax system, taxes can help reduce inequality by attracting greater contributions from those with a higher ability to pay.

Encourage Positive Behavior: Taxes can be designed to encourage or discourage certain behaviors, for example a cigarette tax to reduce tobacco consumption.

Economic Stability and Growth: Taxes provide governments with a means to influence consumption and investment levels, which can impact economic stability and growth.

Example of Tax Use

Infrastructure development: Taxes are used to build roads, bridges and other infrastructure.

Health services: Taxes are used to finance public health facilities and services.

Education: Taxes are used to finance education, from elementary to high level.

Social and Economic Development: Taxes are used for various social and economic development programs, including social assistance and poverty alleviation programs.

By understanding the various types and benefits of taxes, people can better appreciate the role of taxes in financing development and social welfare.

Constitution about Tax

In Indonesia, tax provisions are regulated in several laws and other laws and regulations. The following are several laws and regulations that regulate taxes in Indonesia:

Law no. 6 of 1983 concerning General Provisions and Tax Procedures (KUP):

Last amended by Law no. 16 of 2009.

Regulates general provisions and procedures for taxation which include the imposition, calculation, payment and reporting of tax.

Law no. 7 of 1983 concerning Income Tax (PPh):

Last amended by Law no. 36 of 2008.

Regulates objects, subjects, rates and procedures for calculating Income Tax.

Law no. 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods (VAT and PPnBM):

Last amended by Law no. 42 of 2009.

Regulates the provisions of Value Added Tax and Sales Tax on Luxury Goods.

Law no. 28 of 2009 concerning Regional Taxes and Regional Levies:

Regulates the types of regional taxes and regional levies and the procedures for their imposition.

Law no. 12 of 1985 concerning Land and Building Tax (PBB):

Regulates the objects, subjects and rates of Land and Building Tax.

Apart from laws, there are also various Government Regulations (PP), Director General of Tax Regulations (PERDJ), and other regulations that regulate certain aspects in the implementation of tax provisions, such as tax rates, tax calculations, and reporting procedures.

Taxes are important because with taxes, the government can finance the needs of the people and develop the country. Without taxes, the government will have difficulty financing our various needs, such as education and health. So, by paying taxes, we contribute to developing the country and helping others.

Taxes are regulated by laws and regulations. So, we have to comply. If we don't pay taxes, we could be subject to sanctions or fines from the government. So, let's pay taxes on time and in the correct amount!