Input Tax Credit Denied: Yayasan DKT Indonesia Loses Tax Dispute Following Business Model Shift

VAT Dispute: Testing the Relevance of Legacy Costs in Business Model Shifts (YDI)

The dispute over Input Tax credit often becomes a stumbling block for Taxpayers when there is a disconnect between incurred expenses and the actual operational reality of the company. In the YDI case, the Respondent's correction of Input Tax amounting to IDR 5,175,000 was upheld by the Board of Judges due to the Taxpayer's failure to prove the relevance of pharmaceutical warehouse consultant costs to its new business model. The primary focus of the trial was the examination of Article 9 paragraph (8) letter b of the VAT Law, which requires a direct connection between expenses and business activities that generate taxable supplies.

The Conflict: Business Profile Changes vs. Compliance Costs

The core of the conflict began when the DGT identified that YDI had changed its business profile from a medical device distributor to a marketing service provider since September 2018. The Respondent argued that consultant services from PT Yafefa Primarta regarding PBF warehouse management were no longer relevant for YDI, but should instead be an expense for the affiliated entity that now performs the distribution function. Conversely, YDI insisted that as a foundation holding a PBF license, these costs were still necessary to maintain compliance with pharmaceutical distribution regulations and were supported by valid cash flow evidence.

Judicial Review: Economic Substance and Actual Functions

In its legal considerations, the Board of Judges emphasized economic substance and the Taxpayer's actual functions. Based on the Marketing Agreement evidence, it was revealed that all medical device sales functions had shifted to another party. The Judges opined that maintaining the PBF license and warehouse through consultant services did not directly contribute to the generation of income from the marketing services reported by YDI. Therefore, the "direct connection" requirement failed to be met, rendering the Input Tax legally non-creditable.

Implications: Evaluating Post-Restructuring Expenses

This decision underscores the importance of synchronization between legal documents, business models, and Input Tax credit policies. For Taxpayers, any change in business model or functional restructuring must be followed by a deep evaluation of Input Tax credit rights over legacy costs. The conclusion of this dispute is that formal evidence in the form of Tax Invoices and payment proofs is insufficient to safeguard Input Tax if the functional connection to business activities generating Output VAT has been substantively severed.