Reshaping Property Sector Tax Policy
The property sector is a major economic contributor, accounting for about 14% of Indonesia's GDP including its supply chain. However, inflation and benchmark interest rates continue to impact consumer purchasing power and developer access to financing.
Multiple Layers of Taxation
The industry faces 11% to 12% VAT, a duty on acquisition of land and building rights of up to 5%, 2.5% final income tax, building approval levies, and other regional charges. These layers elevate transaction costs to 18% to 20% of an asset’s value, reducing investment efficiency.
A coordinated fiscal framework is needed, featuring standardized duty on acquisition of land and building rights incentives for first-time homebuyers. Potential local government revenue reductions could be offset through general allocation fund or revenue sharing fund incentives targeting regions that actively increase housing development and homeownership among low-income households.
Tax Risks in Related-Party Loans
Development requires massive upfront capital, making developers especially those using special purpose vehicles (SPVs) highly dependent on debt financing. SPVs frequently obtain shareholder loans or financing from holding companies.
Domestic related-party interest faces a 15% Article 23 income tax, while overseas lender interest falls under Article 26 at 20% or applicable treaty rates. Interest-free loans avoid cash outflows, but the tax authority may scrutinize them under the arm’s length principle. If deemed interest is imposed, companies face severe Article 23 and corporate tax issues. High debt-to-equity ratios may also render interest non-deductible.
Companies can manage risks through equity contributions or by setting arm’s length interest rates supported by market data and transfer pricing documentation. A low, defensible interest rate is much safer than a 0% rate lacking justification.
To ease cash-flow pressure and financing costs, the government could reduce the Article 23 rate for the property sector from 15% to 2%, or apply progressive rates based on transaction values.
Government-Borne VAT Incentive
The government has extended the government-borne VAT incentive for fiscal year 2026, allocating IDR 3.4 trillion to support approximately 40,000 commercial housing units.
This facility covers 100% of the VAT on a tax base up to IDR 2 billion for new homes priced under IDR 5 billion. Available to end consumers based on their national identity number or tax identification number, the incentive is strictly limited to one unit per person. Eligibility demands a notarized sale deed or fully paid binding agreement, alongside physical handover evidenced by a handover certificate.
Administrative challenges remain, particularly regarding handover certificate validation through government systems like Sikumbang and Coretax. Delays or data discrepancies can revoke the incentive, unfairly transferring the VAT burden to buyers even for errors beyond their control.
Integrating the Coretax and Sikumbang platforms would reduce manual validation and protect consumer entitlements. Implementing a three- to six-month grace period for handover certificate completion offers crucial flexibility. Finally, to address oversupplied markets, the government could extend limited incentives to unoccupied, ready-stock units in the secondary market.
