Imposition of Income Tax on Severance Pay: Dispute Analysis and Legal Interpretation in Tax Court Decisions

Figure Ilustration AI

FORMOSA NEWS - Medan - Tax Disputes Over Severance Pay: Indonesian Tax Court Decisions Favor Substantive Protection for Dismissed Workers. Unclear regulations regarding the imposition of Article 21 Income Tax (PPh) on severance pay have led to repeated legal disputes between corporate taxpayers and tax authorities in Indonesia. To address this legal uncertainty, legal researchers Christina NM Tobing and Albert Loudewijk Sentosa Siahaan from Universitas Pelita Harapan Medan Campus published a comprehensive normative study analyzing Tax Court decisions to push for tax norm reformulations that protect the rights of workers facing job termination. The study was published in the International Journal of Law Analytics (IJLA) in 2026. The authors highlight how tax administrative rigidities risk undermining the fundamental role of severance pay as a vital economic safety net for employees during employment termination.

Relevance and Background of the Tax Issue
Termination of employment (PHK) creates immediate social and financial vulnerabilities for workers. Under Indonesian labor regulations, including Government Regulation No. 35 of 2021, employers must fulfill normative obligations to dismissed workers through severance pay, service appreciation pay, and rights compensation pay. From a taxation standpoint, severance pay is categorized as taxable income. Under Government Regulation No. 68 of 2009 and Minister of Finance Regulation (PMK) No. 16/PMK.03/2010, severance pay paid in a single lump sum is subject to a Final Income Tax rate ranging from 0% to 25%, with an exemption for severance amounts under IDR 50 million. However, employment terminations often involve prolonged legal disputes at the Industrial Relations Court (PHI). When legal proceedings delay severance disbursements over several years or force payments in installments, tax authorities frequently reclassify these delayed payments as non-lump-sum income. Consequently, fiscal officers apply normal, higher progressive PPh Article 21 rates rather than the Final Income Tax scheme, causing financial friction for employers and reducing the net funds received by former employees.

Simple Research Methodology
To evaluate how judicial practice resolves these tax conflicts, Christina NM Tobing and Albert Loudewijk Sentosa Siahaan conducted a normative legal study utilizing three main analytical approaches:

• Statutory Approach: Examining the harmony and discrepancies between Indonesian tax legislation and employment laws.
  
• Case Approach: Analyzing legal considerations in a series of Tax Court rulings concerning severance income tax disputes issued between 2014 and 2019.
  
• Conceptual Approach: Evaluating court decisions against Gustav Radbruch’s theory of legal values (legal certainty, justice, and utility) and Adam Smith’s classical principles of tax certainty.
  

Key Findings: Three Primary Dispute Types and Court Trends
The analysis of Tax Court rulings such as Decision No. 5491/2014, Decision No. 56607/2015, and Decision No. 103247/2019 reveals three primary causes of tax disputes and a consistent judicial trend:

• Determination of Tax Payability Timing: The Tax Court consistently affirms that the obligation to withhold Income Tax arises only upon the actual cash realization to the worker, rather than at the time of internal company accounting entries.
  
• Delayed Payments from Labor Disputes: The panel of judges in the Tax Court applies the principle of substance over form. The judges rule that payment delays resulting from legitimate legal processes at the Industrial Relations Court do not alter the core character of the disbursement. Therefore, delayed payments remain qualified as single lump-sum payments eligible for Final Income Tax treatment.
  
• Classification of Severance Components: Fiscal authorities often restrict Final Income Tax treatment strictly to the minimum statutory severance definitions. In contrast, the Tax Court rules that additional compensation negotiated in Collective Labor Agreements (PKB) or Company Regulations (PP) qualifies for Final Income Tax as long as its underlying purpose is compensation for employment termination.
  

Policy Implications and Real-World Impact
This research offers direct insights for policymakers, business entities, and tax administrators seeking to harmonize fiscal interest with social protection. The findings demonstrate that rigid administrative interpretations by tax authorities generate unnecessary litigation in the Tax Court. To resolve these recurring disputes, the authors recommend that tax authorities adopt three explicit regulatory updates:

• Clarify lump-sum definitions to formally recognize delayed payments caused by industrial dispute resolution processes as single-event severance disbursements.
  
• Establish cash-basis realization as the sole standard for determining when severance taxes are due.
  
• Adopt economic substance criteria to classify all termination-related compensation under the Final Income Tax scheme regardless of formal nomenclature.
  

Author Profiles
Christina NM Tobing, S.H., M.KN. Universitas Pelita Harapan Kampus Medan. Expertise: Labor Law, Tax Law, and Civil Law.
Albert Loudewijk Sentosa Siahaan. Universitas Pelita Harapan Kampus Medan. Expertise: Tax Law Analysis and Business Law.

Source
Christina NM Tobing & Albert Loudewijk Sentosa Siahaan. Imposition of Income Tax on Severance Pay: Dispute Analysis and Legal Interpretation in Tax Court Decisions. International Journal of Law Analytics (IJLA). Vol. 4, No. 2 2026, Hal. 179–210.
DOI: https://doi.org/10.59890/ijla.v4i2.195
URL: https://journal.multitechpublisher.com/index.ph