The Existence of Expenses in Dormant Companies and the Waiver of Article 26A KUP in VAT Disputes

Existence of Dormant Companies: The Right to Credit Input VAT During Crisis (The PT BML Case)

Tax Court Decision Number PUT-004957.16/2021/PP/M.XVIIIA Year 2025 affirms an important precedent that the absence of operational activities (production/sales) does not necessarily eliminate a Taxpayer's right to credit Input VAT, provided that such expenses are related to the company's continued existence (going concern). This decision also highlights the Panel of Judges' approach prioritizing material evidence over the formal limitations of Article 26A Paragraph (4) of the KUP Law.

The Dispute: Strict Liability vs. Substance Over Form

The dispute involves PT BML, a company currently in a non-active status and undergoing bankruptcy/PKPU proceedings. The Tax Authority (DGT) performed a correction on Input VAT amounting to IDR 1.45 billion based on two main grounds: (1) The Taxpayer's failure to submit documents during the audit (a violation of Article 29 of the KUP Law implying Article 26A of the KUP Law), and (2) The lack of a direct connection between expenses and business activities (Article 9 Paragraph 8 Letter b of the VAT Law) because the company had no turnover. The DGT applied a strict liability approach to audit procedures, arguing that documents not submitted when requested are deemed non-existent.

Judicial Consideration: Defining "Business Activity"

The Panel of Judges adopted a jurisprudential stance consistent with the principle of substance over form. The Judges assessed that Article 26A Paragraph (4) of the KUP Law should not curtail the Taxpayer's right to prove the truth in court, especially when such non-compliance was caused by force majeure conditions (financial/operational difficulties) rather than bad faith.

The most crucial legal consideration is the expanded interpretation of "direct connection with business activities." The Judges rejected the DGT's narrow view linking business activity solely to active production. The Court recognized that logistics, security, and administrative costs incurred by a dormant company are essential to prevent further losses or asset depletion. Therefore, the VAT paid on these expenses meets the requirements for deductibility and credibility. Validation through the PKPM Confirmation system showing the status "Exist" became the ultimate proof that the state suffered no loss because the tax had been paid.

Implications for Business Entities

This decision provides legal certainty for business entities that are "sleeping" or undergoing restructuring. Their taxation rights remain protected as long as they can prove the validity of transactions and cash flows, even if there were administrative procedural defects during the initial audit process.