Questioning the Meaning of VAT Compensation and 100% Increment Sanction

Directorate General of Taxes (DGT) promised to keep improving the quality of tax audit process, among others by strictly selecting Taxpayers deemed reasonable to be audited. The advanced tax reform will put forward justice and efficiency in conducting tax audit (CNBC Indonesia, 23 October 2018).

This is good news for Taxpayers, especially those who often feel unfairly treated during audit. The good news is expected to be not a mere narrative, but can be followed up with a real action. The other expectation is that the improvement is not only in selection stage upon Taxpayers to be audited, but also in the audit execution stage, inter alia, improvement in implementing tax regulations related to audit process.

Implementation of tax regulation considered unfair by the Taxpayers happens frequently. The example is on the implementation of Article 13 paragraph 3 letter c of Taxation General and Procedures (KUP) Law related to 100% increment sanction of Value Added Tax (VAT) and Sales Tax on Luxury Goods (STLG) underpaid or unpaid. The sanction is imposed due to the Taxpayers’ mistake in compensating the discrepancy in tax overpayment or tax that shall not be charged with 0% rate as referred to in Article 13 paragraph 1 letter c of KUP Law.

From the normative side, the provision of 100% increment sanction of VAT is not a problem. The reason of why the sanction is so high is because the objective of the provision is to give proper punishment to the Taxpayers’ mistakes for not paying the VAT as it should be because they incorrectly compensate the VAT overpayment or mistakenly apply the 0% VAT rate. It may arise from the Taxpayers’ miscalculation, or it can be intentional or fraud. Regardless of the cause, let the law be done.

To re-underline, the aim of the sanction provision is already correct. The problem is, has the implementation been accurate?

Different Interpretation

The source of the problem actually comes from the definition of “kompensasi” (compensation), which is not clearly stipulated in the Tax Law. Referring to Great Dictionary of the Indonesian Language (Kamus Besar Bahasa Indonesia/KBBI), “kompensasi” is equal to: (1) damages; (2) receivables settlement by giving goods in which price is equal to the loan; (3) seeking of satisfaction in a sector to obtain a balance from disappointment in other sectors; (4) management of reward in the form of money or non-money (benefits in kind) given to an employee in a company or organization.

In the context of Article 13 paragraph 1 letter c of KUP Law, it can be understood that the meaning of tax overpayment discrepancy compensation is the use of VAT overpayment to pay tax debt (VAT underpayment) of the following month. This is in accordance with the definition of “kompensasi” based on KBBI, which is “receivables settlement by giving goods in which price is equal to the loan.” This means that the compensation of VAT overpayment can be made if there is a VAT underpayment in the following month.

As an illustration, for example, Taxpayer A reported VAT overpayment in January 2018 of IDR1 billion. The overpayment would be compensated for the tax debt (VAT underpayment) of the following month. Meanwhile, in February 2018, the Taxpayer A reported VAT underpayment of IDR500 million. Because there was VAT overpayment in January 2018 of IDR1 billion that can be compensated, the Taxpayer’s calculation of VAT in February 2018 resulted in the remaining overpayment of IDR500 billion to be compensated for the VAT underpayment of the next month.

Meanwhile, in the tax audit process, for instance, the Tax Auditor was of the opinion that the Taxpayer A’s VAT calculation of January 2018 was incorrect because, during the audit process, there was no VAT overpayment or null. As a consequence, the Taxpayer A would be given a Tax Underpayment Assessment Notice (SKPKB) for January 2018 of IDR2 billion, consisted of tax principal of IDR1 billion and 100% VAT increment sanction of IDR1 billion (upon the incorrect VAT overpayment compensation).

Referring to Article 13 paragraph 1 letter c and paragraph 3 letter c of KUP Law, the 100% increment sanction shall be charged in the tax period or month when the incorrect VAT overpayment compensation was made.

In the above case example, it is true that the VAT overpayment reported by Taxpayer A in January 2018 was IDR1 billion. However, the compensation was just trully conducted by the Taxpayer A in February 2018 of IDR500 million, in accordance with the tax debt (VAT underpayment) of the month.

Therefore, the 100% increment sanction shall be calculated based on the real compensation made by the Taxpayer A in February 2018, which was IDR500 million. It is inaccurate if the sanction is charged to the overpayment base in the previous month (January 2018) of IDR1 billion.

A more extreme case possibly arises to a Taxpayer who has VAT overpayment every month, but not filing for any refund (restitution) on the VAT overpayment. For instance, Taxpayer B reported VAT overpayments in January and February 2018, each of IDR1 billion, and so forth. However, the VAT overpayment will only be refunded in the end of 2018. 

Even though the VAT overpayment in January 2018 was IDR1 billion, there was no compensation in February 2018 because, in February 2018, there was no tax debt (VAT underpayment). The compensation can be made in the next month if there is a tax debt (VAT underpayment).

Similar to the previous case example, for instance, in the audit process, the Tax Auditor considered that the VAT calculation of Taxpayer B was incorrect. According to the Tax Auditor, the amount of VAT overpayment in January 2018 should be IDR500 million, not IDR1 billion as the Taxpayer B reported.

In the usual practice, the Taxpayer B would be given SKPKB for January 2018 of IDR1 billion, comprising the tax principal of IDR500 million and the 100% increment sanction of IDR500 million. Whereas, based on the audit, in January 2018, the Taxpayer B still had its VAT overpayment of IDR500 million. In addition, the fact was that the VAT overpayment in January 2018 reported by the Taxpayer B has not actually used as compensation (deduction) for tax debt because Taxpayer B had no tax debt. Instead, the Taxpayer B had VAT overpayment every month.

Referring the provision of Article 13 paragraph 1 letter c and paragraph 3 letter c of KUP Law, the Taxpayer B should not be charged with 100% increment sanction. It is because, in fact, the Taxpayer B had no tax debt (VAT underpayment). Therefore, the VAT overpayment compensation was not actually made.

The Need for Certainty

The cases above are the examples of how regulation is interpreted differently by the Tax Official and the Taxpayer. The difference is unfair for the Taxpayer because it results in bigger punishment than it should be. Unfortunately, KUP Law does not describe the definition of “kompensasi” that triggers the dispute.

The different perspective often leads to Tax Court. The process is definitely more burdensome for the Taxpayer and the Tax Authority, both in terms of cost and energy. Thus, good faith of the Tax Authority in improving the audit process to be more efficient and fair is really expected by the Taxpayer, especially related to the implementation of 100% increment sanction of VAT.

At last, we hope that the promised regulation will be issued soon and become win-win solution for both the Tax Authority and the Taxpayer.

*Short version of this article has been published in Investor Daily, Thursday, November 29, 2018.

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.