Important! Here Are the Provisions for Protecting the Right to Credit Input Tax on Capital Goods During the Construction Phase

For newly established companies or those undergoing large-scale business expansion, the early operational periods are often spent building infrastructure. The process of constructing buildings, installing factories, or acquiring land for business locations is known as the construction phase or the period prior to making any deliveries.

During this period, the company will make many purchases of capital goods and services subject to Value Added Tax (VAT). Thus, a question arises: “Can the VAT paid when purchasing these capital goods (Input Tax) be credited even though the company has not yet generated sales (Output Tax)?” The answer is yes. However, tax regulations in Indonesia set strict time limits and criteria that must be understood so that the crediting rights are not forfeited or do not result in penalties in the future.

1. Basic Concept of Crediting Input Tax Before Production

Generally, the VAT mechanism adheres to the principle of crediting Input Tax (tax paid upon purchase) against Output Tax (tax collected upon sale). However, the government provides a special facility for Taxable Entrepreneurs (PKP) who have not yet delivered Taxable Goods (BKP) or Taxable Services (JKP).

In accordance with the provisions stipulated in the VAT Law (UU PPN) and its implementing regulations (such as Minister of Finance Regulation Number 18/PMK.03/2021), PKPs that have not yet started production are allowed to credit the Input Tax on the acquisition of capital goods. Meanwhile, capital goods are defined as tangible assets with a useful life of more than 1 (one) year which, according to their original purpose, are not for resale. Examples include factory machinery, major equipment, and land purchased to build operational buildings or business centers.

2. Specific Time Limit (Golden Time)

The government sets a time limit for PKPs to promptly make deliveries (start generating Output Tax). Based on the regulations following the enactment of the Job Creation Law (UU Ciptaker) and the Harmonization of Tax Regulations Law (UU HPP), the general time limit is 3 (three) years from the Tax Period in which the Input Tax was first credited. If, up to this 3-year limit, the PKP has not made any delivery of BKP/JKP related to the said Input Tax, then the Input Tax that has been credited is declared uncreditable.

3. Consequences of Failing to Make Timely Deliveries

If the 3-year period is exceeded and the company has not made any deliveries or commercialized, the law establishes severe consequences for the company's financial condition, including:

4. Definition of "Delivery" that Saves the Input Tax

To protect the Input Tax rights from being forfeited, the PKP must ensure that a VAT-payable delivery has occurred before the 3-year period ends. It is important to note that receiving a down payment from consumers (e.g., room rental advance or product pre-order) accompanied by the issuance of a valid Output Tax Invoice can legally be categorized as a form of JKP/BKP delivery. As long as the delivery is real, valid, and has a direct relationship with the company's main business activities, the right to credit Input Tax during the construction phase will be fully protected.

However, regulations exempt certain activities. The following activities are not considered deliveries in fulfilling this time limit:

5. Conclusion

The construction phase is a crucial phase that requires mature cash flow management. The crediting of Input Tax on capital goods (including land acquisition) is a liquidity incentive that greatly helps companies currently under construction.

To keep this tax right secure, Taxpayers are advised to carefully calculate the date the Input Tax is first credited as the starting point for the 3-year period. In addition, ensure that pre-sales, signing of cooperation contracts, or receipt of down payments that generate Output Tax can be realized before the 3-year deadline expires.