The VAT dispute between PT HI and the tax authorities for the November 2020 tax period reinforces the application of the substance over form principle in Indonesian tax courts. The issue arose when the Taxpayer reported machine sales (BC 2.5 facility) under the "aggregated" (digunggung) column in the VAT Return due to technical limitations of the e-faktur application. The tax authority corrected this, arguing that the Taxpayer was not a retail trader.
[Image: Diagram of Substance Over Form vs. Administrative Formalities in VAT]
The core conflict expanded to Input Tax, where the tax authority rejected VAT credits for spare parts simply because the seller used Invoice Code 01 (collected) instead of Code 07 (not collected), even though the buyer had actually paid the tax. Additionally, the canteen LPG dispute emerged, debating the criteria for a "direct connection with business activities."
[Image: Infographic of Invoice Codes 01 vs. 07 and the Good Faith Buyer Principle]
In its resolution, the Tax Court Board of Judges annulled the corrections on aggregated reporting and spare parts. The Board argued that system limitations should not jeopardize Taxpayer rights as long as the substance of the transaction is correct (VAT-exempt). Furthermore, the Board emphasized that administrative errors by the seller in issuing invoice codes cannot be imposed on a buyer who has fulfilled their payment obligations.
This analysis provides significant implications for corporate tax management: material documentation (proof of payment and goods flow) is the primary shield in court. While invoice formality is important, legal justice continues to protect buyers from unilateral administrative errors by counterparties. However, for employee-related support costs like LPG, the court consistently rejected the credit as they are deemed to have no technical correlation with the main production process.
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