Definition and Mechanism of VAT
Value Added Tax (VAT) is a tax levied on the consumption of goods and services. Its collection mechanism is indirect, as VAT is imposed at every stage of the production and distribution chain, from the producer to the final consumer.
In VAT, two parties are involved:
The party that bears the tax burden: The final consumer.
The party responsible for collecting and remitting the tax: The business or seller.
Fundamentally, VAT is imposed on the value added, not on the total sales amount. The seller collects VAT from the buyer, then remits the difference between the VAT he collected (Output Tax) and the VAT he paid when purchasing goods/services (Input Tax) to the state treasury.
Illustration of the VAT Mechanism Let's look at a simple example to understand how VAT works. Assume the VAT rate is 12%.
Producer (A) sells goods for IDR 10,000,000 to Distributor (B).
A collects 12% VAT from B, which is IDR 1,200,000.
B pays a total of IDR 11,200,000 to A.
For A, IDR 1,200,000 is the Output Tax. A must remit this amount to the state treasury.
For B, IDR 1,200,000 is the Input Tax. This is a tax advance that he can credit later.
Distributor (B) sells the same goods for IDR 15,000,000 to Retailer (C).
B collects 12% VAT from C, which is IDR 1,800,000.
C pays a total of IDR 16,800,000 to B.
For B, IDR 1,800,000 is the Output Tax. B remits VAT to the state amounting to the difference between the Output Tax and Input Tax, which is IDR 1,800,000 - IDR 1,200,000 = IDR 600,000.
For C, IDR 1,800,000 is the Input Tax.
Retailer (C) sells the goods for IDR 20,000,000 to Final Consumer (D).
C collects 12% VAT from D, which is IDR 2,400,000.
D pays a total of IDR 22,400,000 to C.
For C, IDR 2,400,000 is the Output Tax. C remits VAT to the state amounting to the difference between the Output Tax and Input Tax, which is IDR 2,400,000 - IDR 1,800,000 = IDR 600,000.
D, as the final consumer, bears the entire VAT of IDR 2,400,000 and cannot credit it.
Ultimately, the total VAT remitted to the state is IDR 1,200,000 + IDR 600,000 + IDR 600,000 = IDR 2,400,000, which is equal to the VAT paid by the final consumer. This demonstrates that even though it is collected at every stage, the VAT burden ultimately falls on the consumer.
VAT has several key characteristics:
Indirect Tax and Objective Tax
Indirect Tax: The tax burden is borne by the buyer, but the seller (Taxable Entrepreneur/PKP) is the one who remits the tax to the state.
Objective Tax: The VAT obligation arises because of a transaction, regardless of the condition of the tax subject (such as income). This can lead to a regressive nature, where the tax burden feels heavier for low-income consumers. To address this, the government imposes the Sales Tax on Luxury Goods (PPnBM) on luxury items.
Multi-stage Levy but Non-Cumulative VAT is imposed at every stage of the production and distribution chain (multi-stage). However, VAT is non-cumulative (it does not pile up). This is because each business only remits VAT on the value added that they provide, not on the total sales price.
Uses the Indirect Subtraction Method (Credit Method) The calculation of the VAT to be remitted to the state uses this method, where the VAT on sales (Output Tax) is reduced by the VAT on purchases (Input Tax).
Tax on General Domestic Consumption VAT is a tax levied on consumption within the country, not a tax on business activities. Its purpose is to maintain neutrality and not burden business actors.
Applies a Single Rate Indonesia applies a single VAT rate. Since April 1, 2022, the rate has been 11%, and it is scheduled to increase to 12% no later than January 1, 2025. For the export of Taxable Goods/Services, the rate is 0% to maintain product competitiveness in the international market.
The basic concept of the Sales Tax on Luxury Goods (PPnBM) is a tax levied on the consumption of Taxable Goods (BKP) classified as luxury items within the country. PPnBM is an additional levy alongside the Value Added Tax (VAT).
Here is an explanation of its basic concept:
Definition and Object PPnBM is a tax imposed on the delivery of Taxable Goods classified as luxury items by the producer/business who manufactures them or on the import of those luxury Taxable Goods. Goods classified as luxury generally have the following characteristics:
They are not basic necessities.
They are only consumed by certain segments of society or high-income earners.
They are consumed to demonstrate status or social class.
Purpose of Imposition The government imposes PPnBM not solely to increase state revenue, but also for other specific objectives (the regulerend function), namely:
Tax Justice/Equity: To create balance and fairness in the tax burden between low-income consumers and high-income consumers.
Consumption Control: To control consumption patterns of Taxable Goods classified as luxury to prevent excessive consumption (a luxurious lifestyle).
Industry Protection: To provide protection for small or traditional producers from competition with similar luxury goods.
Securing State Revenue: As a source of state revenue.
Collection Principle The collection principle of PPnBM is highly specific, namely:
Only Imposed 1 (One) Time: PPnBM is only imposed at the first level of delivery, which is when:
The manufacturer or producer delivers the Taxable Goods classified as luxury.
The luxury Taxable Goods are imported.
Not Imposed Again: The delivery of luxury Taxable Goods at the subsequent levels (for example, from distributor to retailer, or from retailer to final consumer) is not subject to PPnBM again.
Non-Creditable: Unlike VAT, the PPnBM that has been paid cannot be credited (calculated) against Output Tax by the Taxable Entrepreneur (PKP).
PPnBM Rate The PPnBM rate is set to vary depending on the type and group of luxury goods, with a range stipulated to be a minimum of 10% and a maximum of 200% (according to the VAT Law). Luxury goods that are exported or consumed outside the country are subject to a PPnBM rate of 0%.
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