Input Tax on Employee Milk Denied! Critical Lesson for Taxpayers on the Difference Between PPh and VAT Principles

The Tax Court Decision Number PUT-008825.16/2024/PP/M.XVIIIA Tahun 2025 provides a crucial affirmation regarding the discrepancy in interpretation between the PPh Law and the VAT Law, specifically concerning the right to credit Input Tax (PM) for goods provided as natura or benefits to employees. In the case of PT HI, the correction of Input Tax amounting to Rp42,778.00 from the purchase of sweetened milk for night shift employees was a key issue. The Taxpayer argued that this expenditure was directly related to the production activities and aligned with the PPh provisions allowing natura to be deductible as an expense (PMK 167/PMK.03/2018).

The Core Conflict: Direct Business Connection Principle in PPh vs. VAT

The Directorate General of Taxes (DGT) maintained the correction by relying on Article 9 paragraph (8) letter b of the VAT Law, which explicitly prohibits crediting Input Tax for acquisitions that have no direct connection with business activities resulting in taxable output (Taxable Good/Service Submissions or PKP). The DGT viewed the provision of natura as part of employee compensation that does not satisfy the Added Value principle of the Value Added Tax (VAT). This sparked a conflict of fundamental principles: whether the same expense treatment in PPh automatically grants the right to credit Input Tax in VAT.

Judicial Resolution: Separation of Independence Between PPh and VAT Treatment

The Tax Court Judges (MH) agreed with the DGT's opinion and rejected the Taxpayer's appeal for this specific item. MH emphasized that although an expenditure is allowed as a deduction from Gross Income in PPh, this does not automatically mean its Input Tax can be credited in VAT. VAT is a tax on consumption/added value, and Input Tax can only be credited if it adheres to the direct-use principle and results in taxable Output Tax (PK). Since no Output Tax is incurred from the provision of natura to employees, the right to credit the corresponding Input Tax must be denied. This decision serves as a firm reminder for Taxpayers not to equate PPh and VAT treatments and to always prioritize the VAT principles when testing the eligibility of Input Tax credits.