T

he dispute over the value-added tax (VAT) mechanism between coal miners operating under third-generation contracts and the Finance Ministry’s Taxation Directorate General (DJP) has been dragging on since 2007, causing financial distress to mining firms alongside a 50 percent coal price slump over the past year. The price now sits as low as US$53 per ton.

The third-generation coal mining contract of work, awarded between 1997 and 2000, stipulates provisions that specifically heave to the 1994 Law on VAT that says coal is taxable within the VAT mechanism. Hence, this contract, like the other 54 third-generation contracts, is lex specialist, not subject to laws and regulations enacted after the contract signing until the contract expires.

Problems arose after the government issued a regulation (PP 144) in 2000 stating that coal is not taxable within the VAT system. This regulation contradicts the 1994 VAT law.

This VAT dispute will likely extend further for years to come as the DJP told The Jakarta Post last week that solutions to this problem would be worked out only as part of renegotiations for wholesale amendments of all mining contracts.

In 2008, six giant coal companies refused to pay outstanding coal royalties totaling $598 million to the government, claiming that the governent still owed them the same amount in unpaid VAT refunds. But the companies, which at that time still enjoyed high coal prices, eventually yielded to government pressure.

VAT is essentially a tax that is charged on a broad range of transactions with a tax deduction mechanism allowing businesses to offset VAT paid on inputs against VAT paid on outputs. Each taxable business pays VAT to its providers on its inputs and receives VAT from its customers on its outputs. Input VAT incurred by each business is offset against output VAT.

“We have been forced to lodge our VAT dispute case to the tax court because our claims for VAT restitution since 2011 have been rejected by the tax office, arguing that coal is no longer taxable under the VAT mechanism,” Geoffrey Kelly, a senior executive of PT Kalimantan Energi Lestari (KEL), told the Post.

KEL, which owns a coal mining concession in South Kalimantan with an annual output of 3 to 3.5 million tons under a third generation contract ending in 2031, was acquired by the Geneva-based giant Mercuria Energy Group Ltd. in 2010.

Kelly finds it strange that before 2010 KEL, the previous owners had always received restitution for its input VAT. He complains that the tax authority gives different treatment on the VAT refund because some regional tax offices approve restitutions while other tax offices turn down claims for VAT refund

He said his appeal to the tax court was taken as a last resort form of corporate action because unpaid input VAT refunds had exceeded $6 million.

“I know for sure that five other coal companies won their VAT dispute cases at the tax court. In fact, many other coal companies of the third generation have received input VAT refunds. The DJP refusal of our VAT refund claims is a blatantly discriminatory,” Kelly pointed out.

The Supreme Audit Agency (BPK) also concluded in its 2014 audit of the DJP that the tax authority was discriminatory, or not consistent as regards the treatment of input VAT refund for coal companies.

The BPK discovered that in 2014, DJP approved Rp 1.66 trillion ($123 million) in input VAT restitutions for 11 coal companies but rejected similar VAT claims for refunds from many other coal companies of the third generation.

Executive director of the Indonesia Coal Mining Association (ICMA) Supriatna Suhala also confirmed he had received many complaints from coal companies about the discriminatory treatment of VAT restitutions as DJP regional offices and even judges at the tax court had dfferent views on the VAT mechanism.

“The tax authority kept telling us that coal is no longer VAT taxable, but at the same time we still have to collect VAT for the government from the coal we sell under our domestic market obligation,” Kelly added.

This, he added, constituted a double-blow to KEL because the company could not get VAT refunds for production inputs, but still had to collect the 10 percent VAT on coal sold to domestic buyers. This makes the company’s prices higher than those of other coal producers, he said.

Mekar Satria Utama, the DJP’s director of information and public relations, confirmed to the Post there had been different interpreations and treatment of the VAT mechanism by tax officials and judges at the tax court.

“Therefore, the government is now seeking a comprehensive solution to the VAT dispute by amending the provisions on VAT for coal companies through contract renegotiations to make all coal mining firms subject to prevailing laws [not lex specialist],” Utama added.

But Kelly asserted that what the government had initiated was not negotiation but simply an act of imposing changes to a contract that was still valid. He said further this would severely hurt the coal industry, an industry that plays an important role in the government’s fast-track development of 35,000 MW of power generation until 2019. (vin)