Understanding VAT: Definition, Concept, and the Impact of the 12% Rate Increase

The planned increase in the Value Added Tax (VAT) rate to 12% starting January 1, 2025, has sparked controversy. The policy, outlined in Law Number 7 of 2021 on the Harmonization of Tax Regulations, is deemed inappropriate by some.

One concern raised by various parties is that increasing the VAT rate from the current 11% to 12% could negatively impact purchasing power.

On the other hand, the government views the VAT rate increase as a solution to boost state revenue, providing greater fiscal space to support development initiatives.

But what exactly is VAT, and why is it considered to affect public purchasing power? We have summarized several theories and concepts about VAT as a type of tax to help understand its implications.

VAT as a Consumption Tax

VAT is often referred to as a consumption tax because it is imposed on every consumption or purchase of taxable goods (BKP) or taxable services (JKP). The regulation regarding the imposition of VAT is outlined in Law Number 8 of 1983, which was last amended by the HPP Law.

In general, VAT is payable on transactions involving the transfer of BKP or JKP from the seller to the buyer or consumer. The VAT payable is then collected by the seller who holds the status of a VAT-registered Person (PKP).

However, if the buyer acts as a VAT collector or a special buyer, the VAT payable is not collected by the seller but is paid directly to the state treasury by the collector (Gunadi, 2001).

Examples of special buyers acting as VAT collectors include:

• State Cash and Treasury Office (KPKN) and central government treasurers funded by the state or regional budgets (APBN or APBD).
• Pertamina.
• State-Owned Enterprises (BUMN) or Regional-Owned Enterprises (BUMD), including government banks and regional development banks.
• Work contract (KK) and mining or drilling production-sharing contract (KBH) companies.

VAT Objects

The objects of VAT include, first, the transfer of BKP within the customs area by entrepreneurs. Second, the import of BKP. Third, the delivery of JKP within the customs territory by entrepreneurs. Fourth, the utilization of intangible BKP from outside the customs territory within the customs area.

Fifth, the utilization of JKP from outside the customs area within the customs area. Sixth, the export of BKP by PKP. Seventh, self-construction activities. Eighth, the transfer of assets originally intended not for sale.

Basis for VAT Imposition

The tax base (DPP) is the value used as the basis for calculating the payable tax. The types of taxable bases for VAT include:

Selling Price

The selling price is used as the basis for VAT imposition on the transfer of taxable goods. The selling price refers to the value, including costs, that the seller of BKP requests or should request, excluding VAT and discounts.

Compensation

Compensation is used as the basis for VAT imposition on the transfer of taxable services. The compensation value includes the service fee, including costs that the service provider requests or should request, excluding VAT and discounts.

Import Value

The import value used as the basis for VAT imposition on imports includes the import price, including Cost Insurance and Freight (CIF), plus import duties and additional import duties.

Export Value

The export value used as the basis for VAT imposition includes the value listed in the goods export notification document (PEB), including the costs requested or that should have been requested by the exporter.

Other Values

The taxable base for VAT on other values is distinguished based on the type or purpose of the transfer of BKP/JKP, as follows:

No    Description    VAT Tax Base (DPP)
1    Self-use    Cost price (Selling price or compensation minus gross profit)
2    Free provision    -
3    Transfer of recordings    Estimated average selling price
4    Transfer of story films    Estimated average result per film title
5    Remaining stock of BKP due to company liquidation    Market price
6    Remaining assets from liquidation originally not intended for sale    Fair market price
7    Transfer of travel agency services    10% x invoice/amount to be billed
8    Transfer of parcel delivery services    -
9    Transfer of used motor vehicles    -
10    Transfer of factoring services    5% x total compensation

No	Description	DVAT Tax Base
1	Self-use	Cost price (Selling price or compensation minus gross profit)
2	Free Provision
3	Transfer of recordings	Estimated average selling price
4	Transfer of Story Films	Estimated average result per film title
5	The remaining stock of BKP due to company liquidation	Market Price
6	The remaining assets from liquidation originally not intended for sale	Fair Market Price
7	Transfer of travel agency services	10% X invoice or amount to be billed
8	Transfer of parcel delivery services
9	Transfer of used motor vehicle
10	Transfer of factoring service	5% X total compensation

Tax Invoice

Taxable entrepreneurs who collect VAT on the transfer of BKP or JKP are required to issue a tax invoice, either as a sales invoice or separate from the sales invoice.

In general, there are four types of tax invoices: standard tax invoices, combined tax invoices, simplified tax invoices, and certain documents designated as tax invoices by the Directorate General of Taxes (DGT).

If a PKP, who is required to do so, fails to issue a tax invoice correctly and on time, they will be subject to penalties.

Penalties may range from the payment of the outstanding VAT to the state treasury to administrative sanctions in the form of a fine of 2% of the tax base.

Input Tax Credit

The VAT system applied in Indonesia uses a crediting method. Therefore, the VAT payable will be considered the input tax against the output tax. This means that input tax in a period can be credited against output tax in the same period.

If the output tax is greater than the input tax, the difference must be paid to the state. However, if the input tax is greater than the output tax, the excess can be carried forward to the next tax period or requested for a refund (restitution).

However, some input taxes cannot be credited, including:

• Input tax paid before becoming a PKP. 
• Input tax on the acquisition of BKP or JKP that is unrelated to business activities.
• Input tax listed on a simplified tax invoice.
• Input tax on a standard tax invoice that does not meet formal and material requirements.
• Input tax paid after a tax determination has been issued.
• Input tax that has not been credited in the VAT return and is revealed during an audit, unless the BKP or JKP has been recorded.
• Input tax on the acquisition of BKP/JKP that is subject to VAT exemption. (ASP/KEN)