Apart from functioning as a source of state revenue (budgetary function), taxes also serve as instruments of government policy to regulate economic and social activities (regulerend function). The regulerend function of taxes includes tax incentives or facilities.
Tax incentives are the most widely used fiscal policies by the government, especially during the Covid-19 pandemic. Needless to say, the main goal is to overcome the pandemic that is not only disrupted people's health and social life, but also undermined the national economy. Therefore, the government went all-out with the fiscal stimulus policy to save the economy from recession.
The stimulus includes the government bearing the Income Tax Article (ITA) 21 of employees earning up to IDR200 million a year, exempting the income tax on import, easing the obligation of ITA 25 for certain sector business actors, reducing corporate income tax rates, providing additional incentives related to Bonded Zones and Import Facility for Export Purpose (KITE), and accelerating VAT refund.
Long before the Covid-19 pandemic, the government had issued a lot of fiscal stimuli to speed up the wheel of the national economy, particularly to increase investment and exports.
One of those is the exemption of VAT on certain strategic taxable goods (BKP). Among other things, the goal is to excite the national strategic goods industry. This policy has been implemented for nearly a decade, which initially referred to Government Regulation (PP) Number 12 of 2001. Along with the socio-economic development, the Government Regulation has undergone several changes, the last one being the revision by Government Regulation Number 48 of 2020 dated 24 August 2020. The tax exemption applies for the 10% VAT which should be payable on imports and delivery of strategic goods.
The spirit of granting the VAT exemption facilities on imports and delivery of strategic taxable goods is actually very good. Unfortunately, when it comes to implementation, problems are common. Usually, the problems are triggered by different interpretations, especially concerning the scope of delivery stated in the Government Regulation. The tax authority often argues that the meaning of the delivery of taxable goods includes export activities of taxable goods. In other words, the term delivery is defined as delivery inside the customs territory (domestically) as well as exports.
Due to the difference in interpretation, tax authorities frequently assume that the export of strategic taxable goods is also exempted from VAT. As a consequence, referring to Article 16B of the VAT Law, exporters of strategic taxable goods are unable to credit and refund their VAT In. This opinion surely deviates from the basic principle of VAT, which states that VAT is a tax on the consumption of goods or services domestically based on the destination principle.
In fact, the VAT Law contains clear and explicit separate definitions of the delivery of taxable goods and the export of taxable goods in Article 1 of the VAT Law. The delivery of taxable goods is defined as any activity of delivering taxable goods (Article 1 number 4 of the VAT Law). Meanwhile, the export of tangible taxable goods is any activity of releasing tangible taxable goods from inside the customs territory to outside the customs territory (Article 1 number 11 of the VAT Law). Based on the definition, it is understandable that the definition of export underlines the activities of releasing goods from inside the customs territory to outside the customs territory, making it different from a mere delivery activity.
The VAT Law also specifically regulates the imposition of VAT on exports, namely by imposing a 0% VAT rate on the export of tangible taxable goods; the export of intangible taxable goods; and the export of taxable services (Article 7 of the VAT Law). Therefore, the opinion that considers the export of strategic taxable goods included in activities granted with the VAT exemption facilities is not in accordance with the provisions of Article 7 of the VAT Law concerning the 0% VAT rate on exports. Logically, it is irrelevant to grant VAT exemption facilities on export activities with a VAT rate that is already 0%. In other words, the VAT exemption facility is only relevant for activities initially subject to the 10% VAT payable, namely on the import of strategic taxable goods or the delivery of strategic taxable goods within the customs territory (domestically).
The enactment of the 0% VAT rate on export activities, in addition to the implementation of the basic principle of VAT as a domestic consumption tax, serves as an instrument of fiscal policy to encourage the export of national products. With the application of the 0% VAT rate, the value of the exported goods or services will no longer contain any VAT elements because the VAT In on the goods or services will be refunded by the exporter.
The misinterpretation by assuming that the export of strategic taxable goods is also subject to VAT exemption will result in exporters being unable to credit and refund the VAT In. As a consequence, the value of the exported goods will contain an element of VAT In, causing the selling price of the product uncompetitive abroad.
In order to avoid this misinterpretation, it would be better if the DGT issues an affirmation regarding the definition of "the delivery of strategic taxable goods" in the context of VAT exemption policy, namely the delivery of strategic taxable goods inside the customs territory. If the difference in perception is left alone, a concern of its broader impact arises. Instead of providing incentives to taxpayers, the opposite can happen and potentially trigger disputes. We would not let taxpayers—especially exporters—feel caught up in the "VAT exemption" label, aren’t we?
It would be even better if Article 1 paragraph 2 of Government Regulation Number 48 of 2020 can be perfected by adding the phrase "inside the customs territory" after the phrase "delivery". Thus, the meaning of "delivery" as "delivery inside the customs territory" is crystal clear.
**) a short version of the article was published on Kumparan.com on 1 February 2020.