The Application of the 12% VAT Rate Effective 1 January 2025

The certainty of the VAT rate increase to 12% from the previous 11% has been realized with the issuance of the Minister of Finance Regulation Number 131 of 2024 concerning VAT Treatment on the Import of Taxable Goods, Delivery of Taxable Goods, Delivery of Taxable Services, Utilization of Intangible Taxable Goods from Outside the Customs Area within the Customs Area, and Utilization of Taxable Services from Outside the Customs Area within the Customs Area dated December 31, 2024 (hereinafter abbreviated as PMK No. 131/2024). As is known, this VAT rate increase has caused a pro-contra in the community for approximately the last 3 months, even ending with a wave of student demonstrations in several cities. Judging from its content, it can be concluded that PMK No. 131/2024 is a form of compromise between the President's desire to limit the VAT rate increase only on luxury goods and the desire of parties who only follow the mandate of Article 1 paragraph (1) of the VAT Law.

The form of compromise materializes with the application of the 12% VAT rate, summarized in the following flow:

Flowchart PMK No. 131. Source: DSH Internal

Luxury goods include motor vehicles and, in addition to motor vehicles, as mentioned in PP No. 73 of 2019 in conjunction with PP No. 74 of 2021, PMK No. 42/2022, PP No. 61 of 2020, and PMK No. 15/2022, namely:

Table 1: Luxury goods based on current VAT regulations. Source: Internal DSH

Taxable Goods and Taxable Services deliveries that use Other Values and Certain Amounts before PMK No. 131/2024:

Table 2: Deliveries of Taxable Goods and Services that use Other Values before PMK No. 131/2024. Source: DSH Internal

Based on the treatment described above, it can be concluded that imports and deliveries of luxury goods since February 1, 2025, have experienced an increase in the amount of VAT due to the application of a 12% VAT rate on the full amount (100%) of the Selling Price or Import Value. Deliveries of luxury goods not to end consumers since January 1, 2025, have also been subject to a 12% VAT rate on the full amount (100%) of the Selling Price. Deliveries of luxury goods to end consumers from January 1, 2025, to January 31, 2025, are treated the same as deliveries of non-luxury goods, which, before PMK No. 131/2024, were subject to VAT using Other Values or Certain Amounts, i.e., 12% multiplied by Other Values 11/12.

Another conclusion is that, apart from luxury goods, there are also other items experiencing a VAT increase. This includes the delivery of non-luxury goods that, before the implementation of PMK-13/2024, were subject to VAT using Other Values or Certain Amounts (regulated in Article 4 of PMK-131/2024). This is actually somewhat inconsistent with the President's statement that the VAT increase is only on the delivery of luxury goods. To align with the spirit of restricting the VAT increase only on the delivery of luxury goods, changes to the provisions of Article 4 of PMK-131/2024 are highly anticipated.

Furthermore, on January 1, 2025, the Directorate General of Taxes Regulation (Perdirjen) No. 1 of 2025 (PER-1/2025) regarding Technical Guidelines for Making Tax Invoices in the Context of Implementing PMK No. 131 of 2024 was issued. The most important parts of this regulation are:

1. During the transition period (January 1, 2025, to March 31, 2025), errors in making tax invoices due to incorrect inclusion of the Tax Base fully multiplied by the 12% or 11% rate are not considered mistakes (no penalties).

2. The 1% excess VAT (the effective rate should be 11% but counted as 12%) can be refunded through the mechanism of the buyer requesting the excess VAT back from the seller, and the seller correcting the Tax Invoice.

3. Specifically, for the delivery of luxury goods to end consumers who are not allowed to use Retailer Tax Invoices (deliveries of Motor Vehicles, Yachts, Excursion Vessels, Ferries, Yachts, Airplanes, Helicopters, Hot Air Balloons, Land and/or buildings, Firearms, Firearm Ammunition) even if the delivery is from January 1, 2025, to January 31, 2025, the direct 12% rate applies without using Other Values 11/12 as regulated in PMK No. 131/2024.

   
   

Of course, PER-1/2025 provides relief for Taxable Entrepreneurs (PKP) who have already prepared the creation of Invoices according to the 12% rate and PKP who are still using the 11% rate calculation. Conversely, the provision mentioned in item 3 above raises issues for PKP who deliver luxury Taxable Goods to end consumers who are not allowed to use Retailer Tax Invoices. This provision results in no relaxation (the effective rate of 11% still applies) in January 2025. This is also inconsistent with the provisions of the PMK, which is nota bene above the Perdirjen. Legally, this provision does not comply with the principle of Lex Superiori Derogat Legi Inferiori (lower regulations must not conflict with higher regulations). Furthermore, PMK No. 131/2024 does not contain a clause that there will be further rules regulated by the Perdirjen (delegative regulations). In addition, from the title, PER-1/2025 regulates Technical Guidelines for Making Tax Invoices, not regulating VAT calculations. Therefore, this provision not only confuses the public but also raises legal issues.

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