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Details

  • Service: Tax, Global Indirect Tax
  • Type: Business and industry issue
  • Date: 8/1/2012

Input VAT and the integrated Crude Palm Oil (CPO) Industry in Indonesia 

Input VAT and the CPO

Late last year, the Directorate General of Tax (DGT) banned integrated CPO companies from crediting input VAT on plantation activities. The DGT argued that the delivery of oil palm ‘fresh fruit bunch' (FFB) is VAT-exempt.

In particular, the DGT’s circular stated that input VAT attributable to CPO production can be credited, while input VAT attributable to delivery of FFB cannot. If an entity produces both CPO (VAT-able) and FFB (non VAT-able), the input VAT needs to be apportioned accordingly.


The industry believes recent tax audits and queries might not be in line with the spirit or letter of the VAT law, since in the production chain of an integrated CPO company, there is no ‘delivery’ of FFB.


The prevailing Indonesian VAT law includes provisions for crediting input VAT. It also prohibits crediting input VAT incurred in the course of delivering goods and services not subject to VAT. Following the latest VAT law, the Ministry of Finance issued further guidelines for companies engaged in activities only partially subject to VAT. A circular was later issued by the DGT regulating the creditability of input VAT within the integrated CPO industry.


On a separate but related note, a government regulation was issued earlier this year outlining direct guidelines for the VAT law. One of the regulation’s provisions could be misinterpreted as defining ‘self-consumption for productive purposes’ as possibly triggering VAT imposition. This would mean that processing self-produced FFB in a CPO refinery, within an integrated CPO company, could be considered a ‘delivery’. Under the VAT law, input VAT incurred in the delivery of non-VAT-able goods cannot be credited. This may impact all input VAT incurred by planting activities.


Predictably, this will result in uncertainty in the industry and may affect other integrated industries. The current industry reaction varies by company.


We note that there is substantial risk associated with crediting input VAT from planting activities, both at the tax audit and appeal levels. Based on known cases, the DGT views all input VAT attributed to planting activities as not creditable against output VAT, regardless of the entity’s final output. Based on provisions in the VAT law and on other regulations, there could be grounds for integrated CPO companies to defend, at appeal level, the crediting of input VAT.

 

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