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The new VAT imposed on agriculture products started off with the judicial review request from the Indonesian Chamber of Commerce and Industry to the Supreme Court to revoke several articles in two Government Regulations (GRs) regarding VAT, of which initially was aimed to change the impeding VAT rulings that disallow VAT input related to agricultural products, which were considered strategic goods, for being credited. This tax treatment was claimed to weaken the competitive advantage of agricultural businesses given that this non-creditable VAT input will have to be added to the costs of goods sold, and thus they have lost their cost competitiveness.
As a response to this judicial review request, the Supreme Court issued a decision No. 70/P/HUM/2013 (PUT-70), effective on 22 July 2014, which revoked article 1(1)(c), 1(2)(a), 2(1)(f), and 2(2)(c) of GR No. 31/2007 (GR-31) concerning VAT exemption facility for agricultural products (including plantation and forestry products) as strategic goods.
The Directorate General of Taxation (DGT) responded to this Supreme Court Decision by issuing the Circular Letter No. SE-24/PJ/2014 (SE-24) on 25 July 2014 to implement PUT-70 and to inform all tax officers under the DGT as well as taxpayers about PUT-70 and its tax implications, especially those in the field of agriculture, plantation and forestry.
SE-24 specifies the tax implications of PUT-70 as follows:
- Agricultural products, which are listed in GR-31 and also specifically mentioned in the Elucidation of Article 4A(2)(b) of the VAT Law as non-VAT-able are still treated as non-VAT-able (i.e. fresh fruits and vegetables).
- Other agricultural products, which are only mentioned in the Elucidation if Article 4A(2)(b) of the VAT Law but not specified in the GR-31, are non VAT-able (i.e. rice, grain, corn, sago, and soybeans).
- Plantation products, ornamental plants, herbal plants, food crops, and forestry products which are listed in GR-31 are now VAT-able (previously VAT-exempted) (i.e. oil palm, rubber, cocoa, coffee beans, tobacco, wood, rattan, etc). Thus, sale and import of these products are subject to 10% VAT, while the export is also subject to VAT with a rate of 0 %.
- Entrepreneur with a turnover more than Rp4.8 billion per annum must register as VAT entrepreneur and issue a tax invoice to collect VAT on the sale of these products.
SE-24, since its issuance, has caused major debates among industry players, as it has affected agriculture businesses in every value chain, with different level of tax implications:
- At a farmer level: farmers may not be much affected by this regulation as shielded by the turnover threshold of Rp4.8 billion per annum. Most farmers in Indonesia generate revenues below this threshold.
- At a trader level: this level bears the most of this new regulation. This level comprises of traders who buy agricultural products from farmers. They generate high revenues, more than the 4.8 billion thresholds per annum.
- At a processor/manufacturer level: the implication for this level is not significant as processors usually have lots of VAT input which can be refunded if they do export sales.
- At an end customer level: the implication in general is also insignificant. Those products deriving from agricultural products such as banana crackers and green tea drinks have been subject to VAT for long. However, a price increase is likely for those readily consumed agricultural products delivered by a VAT entrepreneur, such as sweet potatoes, peanuts, coconuts sold at supermarket.
