When Sales Discounts Are Considered Income

The dispute originated from the tax treatment of sales discounts recorded by PT API for the February 2021 Tax Period. Through the issuance of an Underpayment Tax Assessment Letter (SKPKB) for Article 23 Income Tax, DJP imposed a positive correction to the Taxable Base amounting to Rp8.682.101.671,00, on the grounds that such discounts constituted rewards or remuneration subject to Article 23 withholding tax. This correction resulted in the assessment of additional Article 23 Income Tax along with administrative penalties, bringing the total tax payable to Rp1.969.700.761,00.

During the audit and objection process, DJP argued that the sales discount account recorded by PT API did not represent a price discount on the sale of goods, but rather a rebate or incentive granted to distributors in connection with sales activities of PT API’s products. Based on this qualification, DJP considered the sales discount to be income received by the distributors and therefore subject to Article 23 withholding tax at a rate of 15%. The correction was grounded in Article 23 of the Income Tax Law, Article 12 paragraph (3) of the General Tax Provisions and Procedures Law (KUP), and PMK-141/PMK.03/2015. In its assessment, DJP treated the discounts as performance-related benefits, without distinguishing between conditional rebates and sales discounts that function merely as price adjustments.

PT API rejected the correction. According to PT API, DJP erroneously equated sales discounts with rebates or incentives, despite the fundamentally different nature and tax treatment of these transactions. PT API explained that rebates constitute compensation for achieving specific performance targets by distributors, as explicitly stipulated in the Distribution Agreement, and that Article 23 withholding tax had already been duly withheld on such rebate transactions. In contrast, the sales discounts under dispute consisted of genuine sales discounts, both direct discounts and indirect discounts, granted purely as a price adjustment mechanism (price protection) to maintain product competitiveness in the market, without being linked to any performance achievement. Accordingly, PT API argued that these discounts do not constitute objects of Article 23 Income Tax, as affirmed in Circular Letter SE-24/PJ/2018.

In its examination, the Panel of Judges of the Tax Court found that DJP failed to prove that the sales discounts amounting to Rp8.682.101.671,00 constituted rewards or remuneration within the meaning of Article 23 Income Tax provisions. The Panel observed that DJP based its correction solely on the account nomenclature and an assumed linkage to distributor performance, without testing the substantive economic nature of the transactions or properly considering the fundamental distinction between conditional rebates and sales discounts functioning as price adjustments. The Panel also took into account that the distribution agreements and transactional evidence submitted by PT API clearly demonstrated a separation between rebates and discounts, and that DJP’s application of Article 23 provisions was inconsistent with prevailing administrative guidelines.

Based on these considerations, the Panel fully granted PT API’s appeal, declared that the Article 23 Income Tax correction for the February 2021 Tax Period could not be sustained, and annulled the entire tax assessment along with the associated administrative penalties.

This decision reaffirms that the imposition of Article 23 Income Tax cannot be based merely on account labels, but must be supported by an examination of the transaction’s economic substance. Furthermore, the ruling strengthens the distinction between rebates as conditional remuneration and sales discounts as price adjustments, each carrying different tax consequences.

Comprehensive Analysis and the Full Tax Court Decision on This Dispute Are Available Here