Comments on Verdict of the Supreme Court of the Republic of Indonesia No. 57 P/HUM/2010 Regarding Case on Application for Materiel Judicial Rights between Joefly J. Bahroeny, and friends Vs Ministry of Finance
On October 1, 2010, the Indonesian Palm Oil Association (GAPKI), represented by the Chairman and the Secretary General submitted an application for Materiel Judicial Review of the Minister of Finance Regulation No. 78/PMK.03/2010 April 5, 2010 to the Supreme Court of the Republic of Indonesia through the Attorneys. The underlying question to asking for the judicial review was the provisions stated in the Regulation of the Minister of Finance No. 78/PMK.03/2010 governing that Input of Value Added Tax (VAT) which is related to the activities generating Palm Fresh Fruit Bunches for the manufacture of Crude Palm Oil (CPO) can not be credited by the reason that the delivery of Palm Fresh Fruit Bunches is exempted from Value Added Tax.
Petitioner of Judicial Review’s arguments
One of the important arguments put forward by the Petitioner of Materiel Judicial Review (hereinafter: the Petitioner) was that if the credit of Input of Value Added Tax related to the production of Palm Fresh Fruit Bunches was not permitted it would lead to double taxation of the VAT levied.
In its denial, the Minister of Finance (hereinafter: the Respondent) rejected the existence of double taxation argued by the Petitioner. Arguments presented by the Respondent in essence are as follows: the imposition of VAT on the purchase of fertilizers and the collection of VAT on the sale of the CPO was not a double taxation, because the object as well as the subject of the imposition of the VAT was different. At the time of the imposition of VAT on the purchase of fertilizer the object of the imposition of the VAT was the fertilizer and the subject to bear the burden of VAT was the buyer of the fertilizers. While at the time of the imposition of VAT on the sale of Crude Palm Oil (CPO), the object of the imposition of the VAT was the CPO and the subject to bear the burden of VAT was the buyer of the CPO.
Legal considerations of the Assembly of the Judges of the Supreme Court
According to the Assembly of the Judges of the Supreme Court in this case did not occur double taxation, on the grounds that at the time the VAT was levied to the Petitioner due to the purchasing of the fertilizer, the position of the Petitioner was as a buyer, while at the time the Petitioner sold the product in a form of CPO the party who borne/ paid VAT was the buyer of the CPO, the position of the Petitioner at the time of the sale of the CPO only as the collector of VAT and not the bearer / payer of VAT.
To my understanding, either the Respondent or the Assembly of the Judges of the Supreme Court had misinterpreted the definition of double taxation in this case. The arguments put forward by both the Respondent and the judges stating that there was no double taxation in the case in question as either the subject or the object of the imposition of VAT at the time of the purchase of taxable goods related to the producing of Palm Fresh Fruits Bunches and at the time of the sales of the CPO was different. The definition of double taxation as argued by the Respondent and the Assembly of the Judges to my opinion more leads to the definition of double taxation for Income Tax purposes instead of for Value Added Tax purposes. It seems that the Assembly of the Judges could not differentiate the definition of double taxation for Income Tax purposes and the definition of double taxation for Value Added Tax (VAT).
Definition of double taxation occurs, or more precisely cascade effects happens in the imposition of VAT, if there is VAT imposed on the VAT which had been already been levied in the previous stage of the imposition of the VAT.
In the case we discussed, to my understanding, it has been clear that double taxation (or more precisely cascade effect) happened on the imposition of VAT. The argument is as follows: VAT which was levied to the Petitioner, for example at the time of the purchase of the fertilizer, would constitute Input VAT for the Petitioner. Due to the Input VAT could not be credited, then the VAT would be compensated as expense by the Petitioner and it would be entered as a cost item in producing the CPO. In turn, it would raise the selling price of CPO because in it there was an element of VAT which could not be neutralized by the Petitioner (as the Input VAT could not be credited). At the time the CPO was sold by the Petitioner, there would be VAT which was levied on VAT, that was VAT levied on VAT which was compensated by the Petitioner (as this VAT could not be credited) and included in the selling price of CPO. In other words, when the VAT was levied on the sales of the CPO, the amount of Tax Base of VAT which was levied was the amount of the CPO selling price which included the VAT element on it.
- If the legal considerations are error, what is about the validity of the verdict?
- There were also errors in the rebuttal argued by Respondent, which stated that the object of the imposition of VAT on the purchase of fertilizers was fertilizers and the object of the imposition of VAT on sales of CPO, was CPO. To my understanding, in the VAT imposition mechanism, the object of the imposition of VAT is not taxable goods themselves but the deliveries of the taxable goods concerned. Accordingly, the object of the imposition of VAT on the purchase of fertilizers is the delivery (purchase) of the fertilizer not the fertilizer, as well as the object of the imposition of VAT in the sales of CPO is the deliveries (sales) of the CPO concerned not the CPO.
- The verdict of the Supreme Court is the highest court verdict, so the verdict will likely be made as the jurisprudence of the lower courts under the Supreme Court, even by Indonesian tax authorities. Well, if the erroneous verdict made as jurisprudence, then what the world say?