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:

  1. 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.
  2. 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.
  3. 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.

My friends, if you give comment on this issue, I appreciate very much.

About Jaja Zakaria

Nama saya Jaja Zakaria, saya tinggal di Depok, Jawa Barat, kurang lebih 40 km dari Jakarta Selatan. Saya alumni Fakultas Hukum Universitas Gadjah Mada, Yogayakarta, dan Opleidings Instituut Financien, Den Haag, Belanda di bidang Hukum Pajak Internasional. Saya pengarang beberapa buku, e-book, dan makalah-makalah perpajakan. Pengalaman saya antara lain pernah menjadi anggota delegasi Indonesia dalam perundingan Perpajakan dengan Denmark, Mesir, Kanada, Uni Emirat Arab, Kuwait, Turki, Brunei Darussalam, Pilipina, Vietnam, Mongolia, dan Taiwan; dalam Study Group on Asian Tax Administration and Research (SGATAR) meeting; dan dalam Joint Commission Indonesia - China. Saya juga anggota International Word Tax Expert.

Posted on May 23, 2013, in English Version, Forum, Taxation Topic and tagged , , , . Bookmark the permalink. 20 Comments.

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