A Review of Value Added Tax Policy on Animal Feed Industry in Indonesia

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BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi

Volume 27

Number 2 Volume 27 No. 2 (May 2020) Article 6

February 2021

A Review of Value Added Tax Policy on Animal Feed Industry in A Review of Value Added Tax Policy on Animal Feed Industry in Indonesia

Indonesia

Torganda Raymundus Haula Rosdiana

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Recommended Citation

Raymundus, Torganda and Rosdiana, Haula (2021) "A Review of Value Added Tax Policy on Animal Feed Industry in Indonesia," BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi: Vol. 27 : No. 2 , Article 6.

DOI: 10.20476/jbb.v27i2.11580

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INTRODUCTION

The critics to demand-side economic policies or what is known as Demand Side Economies (Keynesian Economics) has given rise to the birth of Supply Side Economics. The demand side economic theory has fallen short in various developed and developing countries, which led these countries into low economic growth and productivity, stagfla- tation, taxploitation, budget deficits and high debt burdens (Aktan, 1989). The supply-side economic was coined by Say (1956), which focuses on the idea of “supply creates own demand” or known as Say's Law. The dictum mirrors that of Keynes’ Law

of “demand creates own supply”. The supply-side economics argues that fiscal policy will increase the Gross Domestic Product (GDP) and high government revenues through incentives and relative prices , whilst excessive taxes will kill production and consumption as well as taxpayers.

Evans (1983) defines the supply-side policy as a branch of the economy that deals with factors that affect the productive capacity of the economy. These factors are (1) tax cuts or tax incentives that would unlock a tremendous increase in the quantity sup- plied of productive resources (labor and capital) to the economy, thereby dramatically raising GDP; (2) a reduction of public expenditures appropriately

A Review of Value Added Tax Policy on Animal Feed Industry in Indonesia

Torganda Raymundus¹, Haula Rosdiana² Faculty of Administrative Science, Universitas Indonesia^1.2

[email protected]¹, [email protected]²

Abstract. The role of tax policy is very important in efforts to increase business productivity, particularly through the provision of tax incentives in line with one of the principles in supply-side tax policy. However, studies to evaluate the Value Added Tax (VAT) policy implementation on animal feed using the supply-side tax policy perspective is very rare. This research is aimed at analyzing the impact of VAT incentives on animal feeds on the tax burden borne by the taxpayer both in carrying out their obligations and obtaining their rights or so called cost of taxation in Indonesia. The research uses qualitative approach with both qualitative and quantitative data. The data is collected through in-depth interview with eleven relevant informants, literature study, and secondary data. The study finds that (1) the policy raises the cost of taxation in the form of compliance cost, direct money cost, time cost and psychological cost for the animal feed industry, (2) the policy has a contra-productive effect to the effort of improving the national animal feed production capacity along with the cascading effect and opportunity cost arising from the policy implementation; and (3) the policy warrants a different impact for domestic animal feed producers and importers due to to the absence of the cascading effect. These findings highlight that the application of tax-incentive distribution of VAT on animal feed input materials disrupts the company’s cash flow and limits the production capacity for business actors since it is in contradiction to the supply-side tax policy principle. This study recommendsa re-regulation and de-regulation as an alternative to tackle the issues.

Keywords: Value Added Tax; Tax Policy; Tax Incentives; Supply-Side Tax Policy, Cost of Taxation

Abstrak. Peran kebijakan perpajakan sangat penting dalam upaya peningkatan produktivitas usaha, khususnya melalui pemberian insentif perpajakan yang sejalan dengan salah satu prinsip dalam kebijakan perpajakan sisi penawaran. Namun, studi untuk mengevaluasi implementasi kebijakan Pajak Pertambahan Nilai (PPN) pada pakan ternak dengan perspektif kebijakan pajak sisi penawaran masih sangat jarang. Penelitian ini bertujuan untuk menganalisis dampak pemberian insentif PPN terhadap pakan ternak terhadap beban pajak yang ditanggung oleh wajib pajak baik dalam menjalankan kewajibannya maupun dalam memperoleh haknya atau biasa disebut dengan biaya perpajakan di Indonesia. Penelitian ini menggunakan pendekatan kualitatif dengan data kualitatif dan kuantitatif. Data dikumpulkan melalui wawancara mendalam dengan sebelas informan terkait, studi pustaka, dan data sekunder. Hasil penelitian menemukan bahwa (1) kebijakan menaikkan biaya perpajakan berupa biaya kepatuhan, biaya uang langsung, biaya waktu dan biaya psikologis untuk industri pakan ternak, (2) kebijakan tersebut berdampak kontraproduktif terhadap upaya tersebut. peningkatan kapasitas produksi pakan ternak nasional seiring dengan cascading effect dan opportunity cost yang timbul dari implementasi kebijakan tersebut; dan (3) kebijakan tersebut memberikan dampak yang berbeda bagi produsen dan importir pakan ternak dalam negeri karena tidak adanya efek cascading. Temuan ini menyoroti bahwa penerapan penyaluran insentif pajak PPN pada bahan input pakan ternak mengganggu arus kas perusahaan dan membatasi kapasitas produksi pelaku usaha karena bertentangan dengan prinsip kebijakan perpajakan sisi penawaran. Studi ini merekomendasikan adanya regulasi ulang dan deregulasi sebagai alternatif untuk mengatasi permasalahan tersebut.

Kata kunci: Pajak Pertambahan Nilai; Kebijakan Pajak; Insentif Pajak; Supply-Side Tax Policy, Cost of Taxation

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RAYMUNDUS, ROSDIANA, A REVIEW OF VALUE ADDED TAX POLICY 59

with tax cuts; and (3) deregulation of tax policy that comes from the complexity of tax regulation that led to decreased productivity. Scholars in the subject are have indicated a balanced supply-side economic policy which includes policies that promote high- productivity economic growth and low inflation at the same time (please provide citations here). Thus, tax cuts in any form (tax relief (for example: tax deductions related to medical expenses for victims of natural disasters). and tax incentives (for example:

tax holidays for a limited duration to boosting up investment, current deductibility for certain types of expenditures or reduced import tariffs or customs duties) are the most important instrument of this policy. Consequently, the supply-side economic is also known as a “supply-side tax policy” or more generally, a “supply-side fiscal policy”.

Tax incentive is designed as a treatment for projects or eligible investment projects with a purpose of – among others - to correct market inefficiencies, to increase positive externalities and ultimately to optimize the value of the investment. Based on this definition, it can be said that tax incentives are given to increase investment in certain sectors or in certain industries which aim to reduce the costs, including tax compliance cost as a result of the complexity of tax incentive rules and risks that must be borne by the industry or sector. Tax incentives must be designed in consideration to aspects related to its feasibility, implementation and evaluation (UN-DESA, 2018).

Essentially, tax incentive is designed on a priority sector to stimulate investments with a time limit in which time the incentive should be evaluated.

Aside from its impact on investment, the positive effect of tax incentive on productivity is well-docu- mented. Bora (2002) argued that fiscal incentives is critical for improving firms’ productivity and other socio-economic benefit. Consistently, Mao and Liu (2019) provide evidence of how incentives influ- encing the level of investment and productivity in China, increasing by 38.4 percent and 8.9 percent, respectively when they are applied to firms relative to the controlled firms. The argument against this comes from Cleve (2008) that highlights the cost of fiscal incentives, such as deteriorating governance and increasing corruption, that outweighs their benefits.

Similarly, an ambiguous finding from Nivievskyi (2018) shows the positive affect of tax consumption on sectoral basis, particularly in agricultural, in Ukraine, as well as the cost-inefficiency that affects the sector productivity growth. Furthermore, tax exemptions strongly undermined efficiency and productivity convergence in agriculture. Mao and Liu (2019) also provide strong evidence in the literature on the effectiveness of tax incentives for firms with financial constraints for investment activities due to impediments in accessing external capital markets.

The supply-side tax policy as a tool of supply- side economy aims to improve market performance by increasing the productivity, and, eventually the demand curve. A limitation on withholding tax on

passive and employment income is foreseen as a mean to provide greater cash flow for production.

In the end, the country will get a bigger tax revenue due to increased national production. The pitfall of instruments of the supply-side tax policy is generally come off in the cost of taxation. The term refers to the tax burden borne by the taxpayers when they are carrying out their tax obligations and obtaining their tax rights. The cost of taxation consists of (1) compliance costs; (2) administrative costs; (3) deadweight efficiency loss from taxation; (4) the excess burden of tax evasion; and (5) avoidance costs (Chattopadhyay & Das-Gupta, 2002). Since high cost of taxation decreases production capacity, the policy requires re-regulation and de-regulation in timely manner. Re-regulation means that the government re-arranges tax policies that were previously regulated that this re-regulation would improve the quality of tax regulations, particularly those related to the cost of taxation, that is compliance cost and administrative cost. Administrative cost includes the costs of legislative enactment relating to the tax system, from initial policy formulation to statutory or other rule enactment. They also include the judi- cial costs of administration of the tax dispute system, which may involve local and national tribunals and – at the extreme – the courts themselves. Tthe high cost of taxation incurred due to a de-regulation can be considered as a a natural consequence of supply- side tax policy. An example would be a revoked VAT regulation on inter-branch transfers. At this point, the implementation of VAT on inter-branch transfers has caused tax burden that exceeds the VAT and have to be borne by entrepreneurs.

The importance of considering the cost of taxation (compliance cost and collection cost) for taxpayers and the government was also stated by Vaillancourt and Clemens (2008). This means the government has to minimize the amount of distortion to the economy due to the tax imposition and be more sensitive to the compliance and administrative cost imposed on individual and business. Similarly, Chattopadhyay &

Das-Gupta (2002) state that the costs to comply to the prevailing tax law are the most important in development theory and research as shown by countries such as the United States, Australia, United Kingdom, Netherlands, New Zealand and India.

In this study, the application of tax incentive on animal feed industry in Indonesia is analyzed in the framework of supply-side tax policy. Animal feed industry has a strategic role in Indonesia due to its vital role in producing poultry products (chicken meat and egg), which contributes to 251,71 Trillion rupiah or 1.62% of the National GDP, absorbing 13.56 million workers in Indonesia or 10.35% of the total workforce in 2018 (Statistics Indonesia, 2020).

Animal feed dominatesthe cost structure of poultry production as shown in Figure 1. Figure 1 suggests that any price volatility imposed on animal feed will affect the price of poultry as oppose to other costs of medicine, wages, utilities and miscellaneous. The

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poultry consumption in Indonesia is steadily increasing from 7.05 kg per capita in 2015 to 7.57 kg per capita in 2019 with a projection of 8.39 kg per capita in 2025 (https://www.statista.com/statistics/757796/

indonesia-poultry-consumption-per-capita/).

The Indonesian government provides VAT incentives on animal feed and input materials. The incentive is designed and implemented to further encourage national strategic industry by providing VAT exemption on imports and / or acquisition of animal feed

Figure 1. Cost Structure of Poultry Industry in Indonesia

and materials for the manufacture of animal feed. The ground for this support is based on the high demand for animal feed (Table 1).

Table 1 shows the consumption of animal feed that has continued to increase in the past five years.

It’s vital role as an upstream industry which is part of the upstream off-farm subsystem in the poultry system is acknowledged (Tanjung, 2013). There are two types of VAT incentives, namely VAT exemption and zero rate. VAT exemption means that the business has to pay the VAT input of acquired goods without being able to claim or calculate the credit for the paid tax on his input against the output tax of goods sold (Tait, 1988). On the other hand, zero rate means that the business is taxed 0% of its input goods thus in the credit mechanism of output tax (tax on goods sold) against input tax (tax on acquired goods) lead

to overpayment tax. Thus, the entrepreneur is eligible to apply for tax refund.

The strategic role of the animal feed industry and the tax incetives that is imposed on the industry brought a need for a critical review on the VAT policy on animal feed input material in Indonesia according to the tax principles. To the best of the author’s knowledge, there are no studies on tax policy implementation on the animal feed industry in Indonesia.

Therefore, this research aims toanalyze the evaluation of the VAT policy implementation on the input materials for animal feeds based on the cost of taxation and supply-side tax policy principles.

Table 1. Indonesia Feed Consumption 2015-2018

RESEARCH METHOD

This research uses a qualitative approach. Data collection is conducted through in-depth interviews with respected informants in the area of policy design. A total of eleven informants from Coordinating Ministry for Economic Affairs (Kementerian Koordinator Bidang Perekonomian), Ministry of Agriculture (Kementerian Pertanian), Fiscal Policy Agency (Badan Kebijakan Fiskal, BKF), Directorate General of Taxes (Direktorat Jenderal Perpajakan, DJP), aca- demicians from Universitas Indonesia, an economist from Institute For Development of Economics and Finance (INDEF), representatives of Association of National Chicken Farmer Organizations (GOPAN), representatives of the Association of Animal Feed Companies (GPMT), representatives of Association of Poultry Breeding Companies (GPPU) and the animal feed producer PT Charoen Pokphand Indonesia. Data were collected by in-depth interviewing informants and making a transcript of the interview. The transcript of the interview was carried out in detail and there was absolutely no manipulation in the process.

Then, each transcript was given a code (coding of the interview results) according to the consistency of the variables in this study. The final process is that the researcher will describe the arguments based on the researchers' logical reasoning, existing theories, and the data found in the data collection process. This study has a limited scalability and generalization since it is performed on a selected business albeit its market share in animal feed sector.

RESULT AND DISCUSSION

The provision of VAT incentive policies on animal feed industry in Indonesia has raised problems of

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cost of taxation. The incentive is an implementation of Minister of Finance Regulation Number 142/

PMK.010/2017 in accordance with the retroactive principle contained in Law Number 12 of 2011 on Establishment of Laws and Regulations In this study, the problems are shown using a simulation data, which then is used to show the implications of the VAT exemption incentive policy on market productivity. The VAT policy on delivery and/or import of animal feed and raw materials for animal feed is stipulated in the Law No. 42 of 2009 on VAT. TheVAT exemption incentives is listed in Minister of Finance Regulations No. 267/PMK.010/2015 (Annex 1) as amended by PMK 142/PMK.010/2017 (Annex 2).

Revision on PMK 267/PMK.10/2015 also raises a problem. The application of PMK is non-retroactive, and contradicts the retroactive principle. In relation to VAT incentives on animal feed input materials, the retroactive principle can be done with a consideration to the positive list which has caused a significant burden to the society. The list registers animal feed input materials that is subjected to VAT that were not previously listed in the list as referred to in Attachment 2.

In other words, the absence of retroactive principle in the application of PMK 142/PMK.010/2017 has caused a significant burden since there exists a (in) compatibility issue resulted in legal (un)certainty; and potentially distorts the animal feed industry development as it could raise the high cost of taxation.

Cost of taxation arises in context of non-retroactiv- ity of PMK 142 / PMK.2017 must be borne by both the seller and the buyer. The high cost of taxation happened because the VAT Law Number 16 of 2009 concerning General Provisions and Tax Procedures (UU KUP) regulates severe tax sanctions for technical and administrative violations related to VAT obligations, among others:

Sanctions related to Tax Invoice

Businesses that deliver animal feed input materials are also subject to administrative sanctions in the form of a fine of 2% of the Tax Base (hereafter DPP), if they fail to produce a tax invoice or overdue in their obligation. Since the calculation of fines is based on the DPP, namely the selling price instead of the amount of VAT payable, the effective percentage of these fines is 20% of the Selling Price.

Sanctions in Underpayment Tax Assessment Letters (SKPKB)

The amount of tax shortfall owed in the SKPKB as per the results of the audit or other information will be added with administrative sanctions in the form of interest of 2% for a maximum of 24 months, calculated from the time the tax becomes due or the end of the tax period, until the issuance of the SKPKB, or a maximum of 48%.

Sanctions for violation of the due date for payment If the SKPKB is not paid at the due date, it will be subjected to administrative sanctions in the form of interest of 2% per month for the entire period, which is calculated from the due date to the date of

repayment, and part of the month is calculated as the full month. Interest on interest is applied in this provision because the basis for calculating tax payable in SKPKB is the tax plus administrative sanctions (interest). The sanction for interest on interest will be collected by Notice of Tax Collection (STP).

Sanctions for buyers

In the current VAT Law, buyers are also subject to

"sanctions" whereby a stipulation states that “Input Tax Crediting as referred to in paragraph (2) cannot be applied to expenditures for: the acquisition of Taxable Goods or Taxable Services whose Input Tax is invoiced with the issuance of tax assessments”.

Thus, VAT input tax can only be used as a deduc- tion (cost of obtaining, collecting and maintaining income). As a result, the buyer must bear an additional tax burden of 25% of the total VAT input tax and the buyer also bears cash flow (eg. cost of money), because the VAT input tax can only be "claimed" after the end of the year when the Corporate Income Tax is calculated. This is different from VAT which adopts the tax credit method so that the cost of money can be relatively minimized.

Besides these penalties, the cost of taxation also emerges along with the potential dispute as a result of the implementation of this regulation. Time cost and direct money cost that should be allocated for dispute resolution often cannot be avoided. The dispute costs during the implementation of Minister of Finance Regulations No. 267/PMK.010/ 2015 (Annex 1) as amended by PMK 142/PMK.010/2017 can be shown below.

Further, the tax dispute resolution process often takes more than 1 year (since objection until decision inkracht) which means the business has to allocate a contingency fund while income is disrupted.

Therefore, this additional cost also becomes a part that should be bonr by the business.

This condition becomes worse if the company does not make any profit that makes the company unable to pay the SKPKB issued by the tax authority.

Eventually, tax collection will be conducted following the Tax collection with a distress warrant, according to the Law No.19 year of 2000 and Law No. 16 the year of 2009. In this case, the taxpayer will have to bear the psychological cost due to name and shame approach whereby an announcement of the tax arrears is made public in mass media, boycott, deterrence, and confiscation. Confiscation can be prolonged to 6 months at maximum if the tax debt remains unclear and the collection continues. On the other hand, the confiscation mechanism along with the collection using distress warrant is still progressing until the taxpayer pays the debt. This could lead to the auction of mobile and immobile goods that are confiscated by the tax officer. The simulation of the cost of taxation due to the non-retroactive implementation of PMK No. 142/PMK.010/2017 is described in Table 2.

The high cost of taxation as a result of this policy implementation could be negated through the re-regulation of the VAT policy exemption on animal feed

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Table 2. Costs Incurred Because of the implementation of Minister of Finance Regulations No. 267/PMK.010/ 2015 as amended by PMK 142/PMK.010/2017

input materials using a retro-active implementation of the PMK 142/PMK.010/2017. A re-regulation would minimize the cost of taxation and provide capacity for firms to increase their productivity through the formulation and implementation of tax policies that are clearly regulated and legally certain.

In other words, the effect of a cost of taxation, especially in connection with the compliance cost as previously mentioned, is clearly against the advantages of VAT as a consumption-based taxation. This is because compliance costs reflect the inefficiency of VAT tax administration and is not in line with the advantages inherent in VAT, such as fiscal, psychological and economic advantages.

Besides having an impact on the cost of taxation, the VAT exemption policy based on the existing regulation also have an impact for the animal feed industry productivty. This is due to the positive list form in

PMK 267/2015 that exclude Meat Bone Meal and Soy Bean Meal which are obviously very important in producing animal feed as shown below.

Based on Table 3, it can be said that 26% of input materials used in the animal feed is not exempted from the VAT. In relation wih productivity in the animal feed industry, real data from of the largest animal feed producers in Indonesia, PT CPI, is used to simulate the implications of the non-retroactive implementation of the regulation to the productivity of PT CPI.

In the production of animal feeds and animal feed input material that is subject to VAT exemption, PT CPI uses input materials classifications as described in the following table.

Based on Table 3, there is 23.35% of the total animal feed input materials used by PT CPI for an input in animal feed production and do not receive VAT exemption as a result of the non-retroactive

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the VAT incentive implementation. This indicates that the incentive distribution does not meet the objective of the incentive distribution concept.

The VAT exemption policy for animal feed industry as regulated in the Ministry of Finance Regulation No. 267/PMK.03/2015 has a particular effect on the animal feed industry. The selective treatment of VAT exemption on the delivery of animal feed input materials to the animal feed producer has impacted the importers of animal feed input materials and the company that delivers the animal feed input materials differently, as depicted Figure 2.

As the credit mechanism does not apply to the input tax in the animal feed production process, eventually it will have an impact on the VAT burden that should be paid by the animal feed producer. This implementation. The cost that should be paid by

the animal feed industry can be minimized with the non-retroactive implementation of the regulation.

The animal feed production cost can be calculated as described in the Table 5 and 6 below.

Table 5 shows the loss of potential production capacity improvement up to 364,479 units due to the burden from the VAT that can not be credited. This could be avoided with the retroactive implementation of PMK 142/PMK.010/2017 to minimize the cascading effect that comes from the VAT burden that cannot be credited and become a part of the production cost and finally affects the animal feeds producer productivity. On the other hand, the emerging opportunity cost also reflects the market inefficiency and causes negative externalities to the animal feed industry from

Table 3. Simulation of Cost Of Taxation Due to the Non-Retroactive Application

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VAT burden gradually will accumulate and cause the cascading effect in the following animal feed distribution and consumption chains. As described previously, this will have an impact on the different treatment to the domestic animal feed producers who process input materials from domestic which is not included in positive list to produce animal feed with importers of animal feed who directly sell animal feed from abroad, thus does not reflect an equal level playing field. This is happening due to the absence of a cascading effect as happened to domestic producers in line with the credit mechanism that does not apply for importers. Furthermore, this tends to

be contra-productive towards the effort of reducing imports and improving competitiveness. Therefore, the VAT exemption policy with the positive list char- acteristics does not accommodate the needs of the national animal feed industry which is the stakehold- ers of this policy.

CONCLUSION

An analysis of the application of tax-incentive distribution of VAT on animal feed input materials has led to a variable cost of taxation for the business.

Conceptually, it is in contradiction to the supply-side

tax policy principle, as it disrupts the company’s cash flow and limits the space for business actor to produce. This indicates the need for re-regulation and de-regulation as an alternative to tackle the issue.

The VAT exemption policy has also led to the cascading effect due to the absence of VAT input tax credit mechanism. This has also led to an increase in the opportunity cost following the loss of potential production capacity improvement. Thus, the implementation of this regulation is also in contradiction to its objective that is to encourage efficiency and improve productivity. Furthermore, The VAT exemption policy is also counter-productive with the effort to boost local investment.

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Considerations. UN DESA& CIAT, New York

Appendix 1. List of Input Materials for Animal Feed that Receives VAT Exemption (Appendix 1 PMK Nomor 267/PMK.010/2015)

Appendix 2. List of Input Materials for Animal Feed that Receives VAT Exemption (According to Appendix 1 PMK No. 142/PMK.010/2017)