Controversies on the Imposition of Income Tax on Income Derived from Construction Business
In Law No. 36 Year 2008, taxation treatment on income earned or received from construction services business is governed in 2 Articles, those are in Article 4 paragraph (2) letter d, and Article 23 paragraph (1) letter c number 2 of Law No. 36 Year 2008.
Article 4 paragraph (2) letter d of Law No. 36 of 2008 (hereinafter: abbreviated Article 4 paragraph (2) letter d) reads as follows:
“(2) The following income may be subject to a final income tax:
d. income from transfer of property such as land and/or building, construction services business, real estate business, and renting land and/or building;”
While Article 23 paragraph (1) letter c number 2 reads as follows:
“(1) The following income, in whatever name and form, paid, apportioned to be paid, or on the due date of payment by a government institution, a resident taxable entity, a person who organizes an activity, a permanent establishment or a representative of any other non-resident enterprises to a resident Taxpayer or permanent establishment, shall be subject to withholding tax of:
c. 2% (two percent) of the gross amount of:
2. compensation in connection with technical, management, construction, consultation and other services, except those that have been withheld under Article 21;”
Although it may be the presence of the two tax regulations above as the fault of the legislature (Government and Parliament), the question will remain concerning which provisions of Articles will be applied in the imposition of income tax on income derived from construction services business.
In the practice, the Indonesian tax authority (in this case the Directorate General of Taxation, hereinafter: abbreviated DGT), opts to use the provisions of Article 4, paragraph (2) letter d, instead of Article 23 paragraph (1) letter c number 2. This can be seen from the policy of the DGT which decided Government Regulation No. 51 Year 2008 concerning Income Tax on Income from Construction Services Business which was then amended by Government Regulation No. 40 of 2009 is still remain in place.
The next question is about what it has been embraced by the DGT is in accordance with the principles of the law? We opine that the provisions of Article to be used for imposing income tax on income derived from construction service business is the provision of Article 23 paragraph (1) letter c number 2, not the provisions of Article 4, paragraph (2) letter d. The reasons are as follows:
- From the text of the provisions of Article 4, paragraph (2) letter d, it can be concluded that the final tax on the income from construction services business is still a possibility. This is reflected in the sentence phrases contained in Article 4 paragraph (2) letter d, which reads: “(2) The following income may be subject to a final income tax:”. While the text of the provisions of Article 23 paragraph (1) letter c number 2 has to be imperative and certainly. It has been clearly governed that the imposition of income tax on income from construction service is through the tax withholding by the payer of the income. The tax rate to be withheld is also fixed and clear that is 2% (two percent) of the total gross income.
- In accordance with the principles of law, in the event there are two or more statutory provisions governing the same thing, the new provisions will put aside the old provisions. Article 23 paragraph (1) letter c number 2 obviously newer existence than Article 4, paragraph (2) letter d.
- The imposition of Income Tax Article 23 is not final. Accordingly Income Tax Article 23 that has already been withheld by the payer of the income constitutes advance tax payment which can be credited against income tax payable. In case there is no income tax payable (in case taxpayer in a state of loss), the income tax already withheld can be refunded to the taxpayer. This mechanism is in line with the principles of income tax. While under the final tax mechanism, the taxpayer in state of loss is remain subject to income tax. This situation is in contrary with Article 4 paragraph (1) of Law No. 36 year 2008 which clearly states that Taxable Object is income, which is defined as any increase in economics capacity received by or accrued by a taxpayer from Indonesia as well as from offshore, which may be utilized for consumption or increasing the taxpayer’s wealth, in whatever name and form. In a state of loss, the taxpayer does not receive or obtain additional economic capacity, contrary even they derive economic slowdown.
The next question is whether the taxpayer may choose to use the provisions of Article 23 instead of the provisions of Article 4, paragraph (2) in imposition income tax on income derived from construction service business.
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Posted on May 23, 2013, in English Version, Forum, Taxation Topic and tagged controversial tax regulation, final tax, income tax article 4 (2), tax on construction. Bookmark the permalink. 20 Comments.