Failed to Prove Input VAT at Audit Stage, Rescued by PKPM Confirmation: Critical Lessons on VAT Crediting for Bankrupt Taxpayers

Despite a Taxpayer being in a non-active operational status and reporting zero income, the Tax Court firmly asserts that this condition does not automatically nullify the right to credit Input Value Added Tax (VAT), as long as the acquisition of Taxable Goods (BKP) or Taxable Services (JKP) maintains a direct connection to the fundamental activities or business continuity in the future, as stipulated in Article 9 paragraph (8) letter b of the Indonesian VAT Law. The Tax Court Decision Number PUT-004952.16/2021/PP/M.XVIIIA Tahun 2025 involving PT BML highlights a crucial dichotomy between the Taxpayer's formal compliance and the material evidence reviewed by the Panel of Judges, where the failure to submit documents at the objection stage was countered by a tax invoice confirmation result that proved the transaction's validity.

Case Background of PT BML and the Directorate General of Taxes' Arguments

PT BML, a tin smelter company, faced a VAT correction for the May 2015 Tax Period amounting to IDR 4,728,363.00. The core of the conflict originated from the Directorate General of Taxes' (DGT) argument, which formally based the correction on PT BML's failure to submit complete books, records, and supporting documents (such as the General Ledger) during the Audit and Objection processes, a serious breach of bookkeeping obligations under Article 28 and 29 of the KUP Law. Consequently, the DGT invoked Article 26A paragraph (4) of the KUP Law to disregard the evidence newly submitted at the Appeal stage. Materially, the DGT argued that because PT BML was non-operational (zero income), the Input VAT was deemed to have no direct connection to the business activities.

The Taxpayer's Rebuttal Regarding Operational Inactivity

In response to this challenge, PT BML refuted the DGT's arguments. They contended that the operational inactivity was due to permit and raw material capital constraints, while the disputed costs (logistics, warehousing, consulting services) were essential maintenance or holding costs necessary to preserve assets and future business prospects, thus fulfilling the direct connection criteria. Regarding the formal non-compliance, the Appellant cited the company's bankruptcy status, which complicated the timely collection of documents.

Systematic Review by the Panel and Evaluation of PKPM Confirmation Results

The Tax Court Panel addressed this dispute systematically. First, concerning the formal aspect, the Panel supported the DGT's actions and refused to consider the evidence newly submitted at the Appeal, emphasizing the paramount importance of Taxpayer compliance at every stage of the administrative legal process. Second, concerning the material aspect, the Panel rejected the DGT's narrow interpretation of the direct link to business activity. The Panel was of the opinion that a Taxpayer currently not operating still has the right to credit Input VAT for acquisitions that support the continuation of the business. The resolution culminated in a material test conducted by the Panel based on the DGT's Audit Working Papers, specifically the results of the Confirmation to Other Taxable Entrepreneurs (PKPM). Of the total correction, Input VAT of IDR 4,028,363.00 was proven valid because it was confirmed as "existing" by the selling Taxable Entrepreneur, while the correction for IDR 700,000.00 was sustained because the PKPM Confirmation showed a "Not existing" result.

Legal Implications and Strategic Takeaways for Tax Practice

The implication of this Decision is very clear for tax practice, especially for companies undergoing transition, non-activity, or restructuring. This Decision sets a precedent that the Tax Court will distinguish between formal error and material error. Even if the Taxpayer fails to meet the formal obligation of document submission, their material right (Input VAT crediting) can still be saved if the available evidence (such as PKPM Confirmation results) demonstrates the truth of the transaction's substance. The key takeaway is that the strongest evidence in an Input VAT fictitious/invalid dispute is third-party confirmation, and Taxpayers must exert maximum effort to minimize formal risks from the audit stage so that all defense evidence can be considered. The Panel of Judges ultimately granted a Partial Appeal, which effectively reversed 85% of the total VAT correction proposed by the DGT.