Indonesia imposes 10% value added tax on coal under Omnibus Bill

The Indonesian government has determined that coal will be subject to a value added tax (VAT) of 10% in accordance with recently passed Omnibus Bill on Job Creation.

In a conference last week, Minister of Finance Sri Mulyani commented that the Job Creation Law emphasizes on treating coal as a taxable item and therefore it should be subjected to VAT.

This provision is contained in Article 112 of the Job Creation Law. The regulation amends several provisions in Law Number 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods.

Article 4A paragraph (2) of Law Number 8/1983 becomes one of the articles amended in the Job Creation Law. This article explains that the types of goods that are not subject to VAT are certain goods in the group of goods such as mining or drilling products taken directly from the source, excluding coal mining products. Meanwhile, in the explanation of Article 4A it is written that the coal commodity which is not taxable and not subject to VAT is coal before it is processed into coal briquettes.

The coal VAT is effective when the Job Creation Law comes into effect from the date of promulgation, namely on November 2, 2020 and there is no transition period in the implementation of the law.

Changes in the coal mining sector include plans to impose a 10% VAT for coal commodities and a 0% royalty for coal companies that have carried out downstream activities.
Market exports opine that the real purpose of this is to actually increase the value of the commodity, not just to export raw coal, which will benefit the state government in the form of increased non-tax and tax state revenues.

In fact, the government is also aiming for higher foreign investment in the form of cooperation to build factories or certain downstream facilities, such as that carried out by PT Bukit Asam Tbk (PTBA) together with Air Products.

However, this coal downstream facilities have a fairly long road. The downstream project certainly requires a feasibility study beforehand as the facilities are inaccessible and take years to build.

“With this assumption, several companies still rely heavily on coal exports, such as PT Indo Tambangraya Megah Tbk (ITMG) and PT Harum Energy Tbk (HRUM),” explained Catherina.
Therefore, it can be concluded that only a few companies will benefit from a 0% royalty, while many companies would continue to compete to meet these requirements.