WHERE AUSTRIAN ECONOMICS MEETS REAL WORLD ACTION

Indonesia's 0.5% tax for small traders now favours a sole owner under Rp4.8bn, for good. The cost is the hire, partner and order that never happen.

It's December 2026, and you run a catering business in Surabaya as a one-person company, a perseroan perorangan. Sales for the year are heading for Rp4.5 billion, and you pay 0.5% of them in tax.

Your cousin offers to put money in and become your partner. With her capital you could open a second kitchen, take the office-canteen contracts you keep turning away, and hire half a dozen cooks.

Then you read the rule. The 0.5% is for a company with one owner. Take your cousin in as a co-owner and yours isn't one any more. And the second kitchen would take your sales past Rp4.8 billion. Cross that once and the 0.5% is gone for good.

So you thank your cousin and say no. The kitchen isn't built, the cooks aren't hired, and the canteen contracts go to someone else. Nobody records that conversation.

On 22 April 2026 Indonesia issued Government Regulation No. 20 of 2026 (PP 20/2026). It amends the 2022 rules on the final tax for small businesses and took effect the day it was published.

The core is unchanged. A qualifying business pays a final income tax of 0.5% of its gross turnover: its sales, before any costs. What changed is who qualifies, and for how long. Three Indonesian business forms matter here: the limited partnership (CV), the general partnership (firma) and the limited company (PT). A one-person company is a limited company with a single founder:

Who can use the 0.5%

What counts toward the line is wide: the whole of last year's turnover from business and from professional work, whether or not that work is taxed at 0.5%, including turnover earned abroad. A married couple who file separately are added together, with all their one-person companies, and so is a minor child's income.

The government's case, from the regulation's own explanatory notes:

—       Bookkeeping is hard. In principle every business must keep books to work out its profit. Individuals and one-person companies struggle to, "mainly due to limited knowledge, skills and time". A tax on turnover spares them that.

—       The old rules were gamed. Some taxpayers used the 0.5% "to avoid tax", so the regulation now adds an owner's businesses together. Its own example of the new rule: Mr D, a trader in communication devices, and his two one-person companies turn over Rp6 billion between them. From the next year, he, both companies and any one-person company he sets up afterwards are out.

—       The aim is formality. The preamble says the change is meant to encourage more people to "take part in formal economic activity", with ease and simplicity that is "well targeted".

Concede all of it. A tax on sales is simpler than a tax on profit. Splitting a business to stay under the line was real. And the rules are published, with worked examples, so any trader can check where they stand. You can price a rule.

Take every word of that as true. What follows is unaffected.

The tax now decides the shape of the business

Look at who still qualifies: one person trading in their own name, a company with one founder, or a cooperative for its first four years. Everything in between is shut out unless it was already in: the partnership, the family firm with two shareholders, the company an outside investor can buy into.

So the cheapest way to own a small Indonesian business is now alone. Taking a partner used to turn on what the partner brings: money, a skill, a customer list, a second pair of hands. Now it turns first on a tax question. Can I afford to lose the 0.5%?

That matters, because a partner brings capital a bank may not lend, and shares the risk of using it. A business that turns equity away has what's left: the owner's savings, the owner's profits, and whatever it can borrow, on a lender's terms, with the risk on the owner alone. Near the line, the profits are capped too.

The regulation says it wants more people in the formal economy. But the formal steps a growing business takes are a partner, a company and a set of books, and those are exactly the steps that now cost it the 0.5%.

What a business that won't grow doesn't do

A trader holding sales at Rp4.7 billion doesn't just forgo the extra sales. It doesn't hire the next cook, doesn't buy the bigger oven, and doesn't sign the supplier contract that needed volume. Those are people who would have been paid and goods that would have been bought. None of it shows up anywhere, because none of it happened.

The canteen contract our caterer turns down probably goes to someone else: another sole trader, or a large firm that never qualified. Trade carries on.

What's lost is which business grows. The caterer customers chose stays at one kitchen. The work is spread across firms that are each held small, rather than gathered in the one that does it best.

Henry Hazlitt made the point long ago: a country gets richer through more output per hour, not through more work. Output per hour rises with capital per worker: the second kitchen, the better equipment, the manager who frees the owner. Wages follow it. An economy of one-owner firms held under a line can keep everyone busy and still stay poorer than it needs to be.

Decisions made on eligibility, not customers

A profit tells a business that customers want more of what it does. Near the line, that signal is overridden. The question "will this serve a paying customer?" becomes "will this keep me eligible?" Each answer looks sensible on its own:

—       The December order is pushed into January, or turned down.

—       The cousin's money comes in as a loan, not a share.

—       A spouse's side business is wound down, because the two are added together.

A one-way door

This is the cliff that punishes growth, with two added features. It counts income the 0.5% never taxed: in the regulation's own example, Miss E earns Rp3.5 billion as an insurance agent and Rp1.5 billion from catering, so from the next year her catering loses the 0.5%. And it's permanent. Once over, an individual and her one-person companies can never come back. Even choosing to keep full books and pay the ordinary rates is for good.

"Without a line, big firms would pay 0.5% too"

That's the best objection. But the regulation's own reason for the 0.5% is that working out profit is too hard for small firms. If that's true at Rp4.7 billion, it's true at Rp4.9 billion. The difficulty is in the general tax system, and the 0.5% is a way around it for some. The owner count fails the same test: the books of a two-partner kitchen turning over Rp1 billion are no harder to keep than a sole trader's at Rp4.7 billion. Fix the general system, and nobody needs a line, an owner count or a family sum.

This is analysis, not legal or tax advice. Check your own position with an adviser.

One income-tax rule for every business, whatever its size, legal form or number of owners. If working out profit is too hard for small firms, make it simple for all: tax profit at one rate, worked out from a plain record of cash in and cash out.

No turnover line, no owner count, no family sum. The avoidance problem goes with them: with no line to stay under, there is no reason to split a business.

The test of intent: if the books are too hard for one owner, a second owner doesn't make them easier. Remove the line and the owner count, and profit, not eligibility, again decides the hire, the partner and the December order.

Stay free,

Jean-Pierre

The Austrian Actor

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