**3.3 The prevailing legal concept of tax collection on the acquisition of rights over land and building in Indonesia**

The transfer of rights over land and building results in the rights and obligations to to pay income tax and acquisition duty for the involved individual(s) or legal entities, both the acquirer and the one attaining property, be it through sale and purchase, exchange of properties, release of right, grant, grant given through testament, auction, inheritance, or other means as agreed upon by the parties [22].

The underlying legal basis for tax collection in Indonesia is the stipulation in the Third Amendment of Constitution 1945 Article 23(A), which stated that "[a] ll taxes and other levies for the needs of the State of a compulsory nature shall be regulated by law." This is the legal ground of all tax obligations serving as the basis for the Government to collect taxes from the people. Said amendment gave off positive impact, particularly in ensuring that there shall be no arbitrary undertaking in the imposition of compulsory levies upon the people. Moreover, in relation to the legality principle which endow authority to the State to collect taxes only when it is needed

and that it shall be based the Law and in no way will be imposed without the consent of the people conveyed through their chosen representative seating in the House of Representatives [23].

The understanding of tax based on Article 1 Law No. 28 Year 2007 concerning the Third Amendment of Law No. 6 Year 1983 concerning General Stipulations and Taxation Procedures is that "[t]ax is the obligatory contribution towards the State due and payable by individual(s) or entities that is compulsory in nature based on the laws, without any direct return and yet is utilized to fund the needs of the State in working to achieve the maximum possible prosperity of the people." According to P.J.A. Andriani as bridged by Santoso Brotodihardjo [24], limitations are given to the definition of tax, as follows: "[t]ax is the collectible to the State that is enforceable and is due and payable by those obliged to pay according to the laws and regulations, without obtaining any direct return of services, which purpose is to fund general expenses related to the State's duty to run the governance".

There are several differences between tax and official levies. Taxes (such as Income Tax) are collected based on law, are compulsory in nature, and there is no direct return received by the tax subject, yet it is to be utilized to achieve prosperity for the Indonesian people. Acquisition duty are classified as regional taxes and shall be borne by the buyer or the person acquiring the land rights. While official levies are charged based on the regulations issued by certain Government institution, yet their collection is not mandatory although it results in direct return. The regional retribution for waste and cleaning services, fees for printing ID card or other civil documents, or retributions related to legal permits, such as the Land Building Permit (*izin mendirikan ba*ngunan) [25].

In implementing tax collection, attention shall be given to the principles underlying tax collection in Indonesia, as follows [26]:

7.Principle of regions, meaning that tax collection is classified based on the the domicile of the tax subject. If the tax subject resides abroad, the Indonesian Government cannot impose upon him any due levies.

The implementation of tax collection in Indonesia includes: (1) *Self Assessment System* i.e., the tax collection system which liberates the tax subject to actively participate in calculating, paying, and independently filing/ submitting the Tax Forms to the Office of Taxation Services. The tax officers only carry out supervisory function as well as tax investigative measures. This tax collection system is usually applicable for income tax, value added tax (VAT), as well as acquisition duty. This is regulated in Article 4(1) and 4(2) of Law No. 7 Year 1983 concerning Income Tax, which has been amended several times, the last one through the Law No. 36 Year 2008 and the Governor of Jakarta Regulation No. 34 Year 2022 concerning the Procedures for Electronic Payment, Filing, Services, and Supervision of Acquisition Duty; (2) *Official Assessment System* i.e., a sistem relying on the tax officer to determine the amount of tax due for payment by the tax subject. The role of the tax subject is relatively passive due to all the help provided by the appointed officer. This system is usually applied to regional taxes such as daerah seperti Tax over Land and Building as well as other regional taxes; and (3) *Witholding System* i.e., the tax collection system which authorized third parties (neither the tax subject nor the tax official) to determine the amount of taxes due and payable by the tax subject. Third parties involved are usually tax consultants, public consultants, public notary, land deed official, and the treasurers or the department responsible for tax affairs who exercise pay cut to settle the employees' income tax on their behalf.

Income tax is the deduction on income due and payable in relation to any gain attained through asset transfer by means of grant, aids, or charities, with the exception of transfer to 1st degree blood-related relatives as well as religious, educational, or socially-oriented entities including foundation, cooperation, or individuals running micro and small enterprises, which is further regulated in the Ministry of Finance Regulation, insofar as there is no relationship among the enterprise concerned, occupation, ownership, or possession among the parties involved.4

In short, Article 4 regulates of income tax on certain incomes with nature of finality and which cannot be creditted as due income tax.5 Article 4(1) and (2) of Law No. 36 Year 2008 concerning the Fourth Amendment of Law No. 7 Year Notification concerning Income Tax elaborates that tax object is any increase in economic capacity received or attained in any form by certain tax subject which can be ploted for consumption or to further increase the wealth of the tax subject concerned, including additional cash income from an exchange of rights over land and building.

The tariff of income tax due to the transfer of land rights and/or building is6 : (1) 2,5% of the gross value of rights transfer, payable by the tax subject whose main business involves transfering of rights over land and/or building; (2) 1% of the gross value of rights transfer when it involves rights over modest housing or strata title units, (3) 0% for the transfer of rights to the Government, State-Owned Entities with

4 Indonesia, Law Republik Indonesia No. 36 Year 2008 concerning Perubahan Keempat Atas Law No. 7 Year 1983 concerning Pajak Penghasilan, Article 4 (1).

5 Indonesia, Law Republik Indonesia No. 36 Year 2008 concerning Perubahan Keempat Atas Law No. 7 Year 1983 concerning Pajak Penghasilan, Article 26 (5).

6 Indonesia, Law Republik Indonesia No. 36 Year 2008 concerning Perubahan Keempat Atas Law No. 7 Year 1983 concerning Pajak Penghasilan.

#### **Table 1.**

*Income tax calculation.*

special Government mandate, or Regional-Owned Entities with special mandate from the Head of Region, in accordance with the law regulating land procurement for development purposes in the public interests.

In this particular case, the calculation of income taxes due to transfer of rights over land and building through properties exchange are as follows (**Table 1**).

Since there is a capital gain or increase in wealth due to the additional cash amounting Rp. <IP_ADDRESS>,- given by the Second Party to the First Party due to the properties exchange, said additional capital shall be subject to income tax in accordance with Article 4(1) of Law No. 36 Year 2008 concerning the Fourth Amendment on Law No. 7 Year Notification concerning Income Tax. In this case however, said additional capital was not reported as a ground to impose income tax and, just as well, there has yet to be any actions from the Directorate General of Taxation concerning any underpayment or miscalculation in the tax report filed which results in the loss of the State income.

The main analysis of the case focus on the issue of the income tax on the capital gain amounting Rp. <IP_ADDRESS>-, resulting from the transfer of rights through properties exchange. Should this gain not reported to the tax authority, the tax subject shall be charged an administrative sanction and fines amounting 2% monthly of the underpaid amount, but if the tax subject is not given the Notification Letter of Tax Underpayment isssued by the Directorate General of Taxation, then the administrative sanction cannot be enforced to be paid, however it is only right for the tax subject to report said underpayment through DJP Online website. If no such report is filed whether because of miscalculation or simple mistake in writing/calculating the income tax or the tax subject does not try to petition for tax correction, then upon comprehensive inspection the tax subject shall be charged by taxation criminal and administrative sanction as well as fines amounting 2% per month for up to 24 months of the underpaid amount or calculated since the tax is due or until the Letter of Tax Billing is issued by the Office of Taxation Services. This is regulated in the Law No. 28 Year 2007 concerning the Third Amendment on Law No. 6 Year Notification concerning General Regulations and Taxation Procedures.

Acquisition duty is the tax imposed the acquisition of rights over land and building, while the acquisition of rights over land and building is a legal action or event which results in the attaining of rights over land and building by individual or legal entity through sale and purchase, exchange of properties, inheritance, grant, and other means of property transfer.

In the light of the above, acquisition duty falls into the category of enforceable regional tax and the tax rate due is set by the Regional Government Institution based

#### *Analysis of Transfer Tax Imposition on Properties Exchange in Indonesia DOI: http://dx.doi.org/10.5772/intechopen.112430*

on the prevailing laws and regulations, the amount collected is then utilized to achieve the highest possible level of prosperity for the people. Based on Law No. 1 Year 2022 concerning the Financial Relations between Central and Regional Government, one of the previously centrally-collected tax which has been shifted into becoming a source of regional income is acquisition duty. The policy accounted for the shift was decided through a lengthy deliberation process of the proposed regulatory bill between the Government and the People's Representatives. Taking into account various strategic factors and differing regional conditions, the Government and the People's Representatives have finally agreed to shift acquisition duty to become a source of regional tax under several conditions, among others [27]: (1) the collection of acquisition duty can be carried out by the regional government offices in an optimal manner; and (2) there will not be any reduction in the quality of services towards the people.

The policy to shift acquisition duty to become part of regional taxation is based on the consideration that acquisition duty fits the criteria of a good regional tax, could increase the native regional income, improves *local accountability*, as well as adjusting the local standard in accordance with the *international good practice* [28]. The legal subject of acquisition duty is individual(s) and/or legal entities that acquires rights over land and/or building.7 Whilst tax object is the acquisition of rights over land and/ or building, which includes8 : (1) the transfer of rights by means of sale and purchase, exchange of properties, grant/gifting, grant given through testament, inheritance, asset in lieu of capital injection into a legal entity, separation of rights resulting in rights transfer, appointment of buyer in an auction, execution of final and binding court verdict, merger, consolidation, business expansion; (2) the granting of new rights following a release of rights or otherwise.

The maximum tax rate of acquisition duty is set at 5%. The determination of tax rate is also stipulated by regional laws/regulations, and the due amount of acquisition duty is calculated based on the tax rate of Tax Object Acquisition Value.9 The imposition of acquisition duty on properties exchange is based on the Tax Object Acquisition Value or the market value as the tax basis to calculate acquisition duty, where the Tax Object Acquisition Value or market value is according to the value agreed upon by the parties, and if the Acquisition Value of Tax Objects is unknown or if the value and market value are below the regionally determined Acquisition Value of Tax Objects, then the calculation of Land and Building Rights Acquisition Duty tax that will be used to determine the tax rate is the regionally determined Selling Value of Tax Objects determined by the Regional Government.

Article 46(5) of the Law No. 1 Year 2022 concerning the Financial Relations between Central and Regional Government regulates that NPOPTKP is set at a minimum of Rp. 80.000.000,- (eighty million rupiah) applicable for each tax subject for their first right acquisition in the year in the region where the acquisition duty is due. The Non-Taxable Tax Object Acquisition Value for acquisitions due to inheritance or grant based on testament attained by individual(s) who are blood-related in the first degree with the testator, including husband/wife, is set at at minimum of Rp 300.000.000,- (Three hundred million rupiah) in Jakarta.10 Each regions can set a

7 Indonesia, Law No. 28 Year 2009 concerning Pajak Daerah dan Retribusi Daerah, Article 186 (1).

8 Indonesia, Law No. 28 Year 2009 concerning Pajak Daerah dan Retribusi Daerah, Article 185.

9 Indonesia, Law Republik Indonesia No. 1 Year 2022 concerning Hubungan Keuangan Antara Pemerintah Pusat Dan Pemerintahan Daerah, Article 47 (5).

10 Indonesia, Law Republik Indonesia No. 1 Year 2022 concerning Hubungan Keuangan Antara Pemerintah Pusat Dan Pemerintahan Daerah, Article 46 (5).

#### **Table 2.**

*Calculation of tax duty on acquisition of land and building rights.*

different amount of Non-Taxable Tax Object Acquisition Value insofar as it is not below the the value determined by the Law mentioned above [29].

The calculation of acquisition duties due to transfer of rights over land and building through properties exchange in this case are as follows (**Table 2**).

In this case, the second shophouse unit was given deduction amounting the regionally-set the value of the acquisition of non-taxable tax objects, which went against the Law No. 1 Year 2022 concerning the Financial Relations between Central and Regional Government Article 46(5), which stipulates that the value of the acquisition of nontaxable tax objects is set at a minimum of Rp. 80.000.000,- for each tax subject, applicable only to the first acquisition of land rights by the tax subject in the year in the region where the acquisition duty is due. This means that the deduction by The value of the acquisition of non-taxable tax objects set by the Jakarta Regional Government at the amount of Rp. 80.000.000,00,- is no longer applicable in calculating the acquisition duty due for the second and all following acquisition(s) made on the same year.

The collection of acquisition duty is carried out based on the self-assessment system, where the tax subject is supposed to calculate, pay, and file the amount of due acquisition duty, all by himself [26]. Within this scheme, the acquisition duty payment by the tax subject shall be validated by the tax official to know the truth of the payment as proven by filling out the Local Tax Return. One of the elements that needs validation is the truth concerning the taxable amount as the basis to calculate the acquisition duty, that is the Tax Object Acquisition Value i.e., the acquisition (and most of the time, market) value of the objects of properties exchange. Therefore if the validation process of the acquisition duty is approved and cleared, then the tax subject shall receive the proof of Local Tax Return.

Should any amount underpaid or miscalculation is found only after the tax subject has properly filed the Local Tax Return in 2023, such as in this case where the error occurred during the tax validation stage, then within 5 years following such finding the Regional Head shall issue the Notification Letter of Regional Tax Underpayment as well as imposing administrative sanction set in Article 97(2) i.e., a 2% interest per month for maximum 24 months, calculated based on the amount unpaid or still due. The legitimacy for the Regional Head to issue said Letter is based on the following11: (1) if based on inspection the tax due is found to have not been reported, unpaid, or underpaid; (2) if Local Tax Return is not filed in time and still is not filed in the timeframe given

11 Indonesia, Law No. 28 Year 2009 concerning Pajak Daerah dan Retribusi Daerah, Article 97.

#### *Analysis of Transfer Tax Imposition on Properties Exchange in Indonesia DOI: http://dx.doi.org/10.5772/intechopen.112430*

following a written warning; (3) if the obligation to fill the Local Tax Return, the tax due is calculated secara jabatan, artinya dalam penjelasan pada ayat (1) huruf a angka 3 is imposed an administrative sanction amounting 25% of the taxable amount.

Likewise in the case at hand, the second party in filing the Local Tax Return to the Regional Government Institution is bound to a miscalculation and therefore underpayment since the acquisition duty imposed on the second shophouse unit was deducted by Non-Taxable Tax Object Acquisition Value. Such deduction is actually applicable only to 1 shophouse unit as the first acquisition made in the year by the tax subject. Nonetheless this fact went amiss during the Notification of Regional Tax (*Surat Pemberitahuan Pajak Daerah*/ Local Tax Return) validation process and the Regional Government Institution has approved of the filing/report and validation process of the acquisition duty including said deduction.

The error made in validating the Local Tax Return results in administrative sanction which is charged upon the tax subject and there has yet to be any sanction against such mistake made and approved by the Regional Government Institution in charge of supervising the regional tax filing. The lack of precision in supervising the validation process of Local Tax Return filing gives way to potential future burdens and losses on the part of the tax subject, who assumes that all tax obligations have been cleared through the submission of Local Tax Return for the payment of acquisition duty due to exchange of properties. This mistake is understandable though due to the rarity of transactions occured involving the exchange of 2 land rights which resulted in the mistake concerning the application of Non-Taxable Tax Object Acquisition Value, whether for the first right acquisition by the tax subject or the non-applicability of deduction by Non-Taxable Tax Object Acquisition Value for the second right acquisition, and even whether categorized as 1 single transaction of exchange of properties involving the exchange of 2 land rights. The lack of clarity in Law No. 1 Year 2022 concerning the Financial Relations between Central and Regional Government, specifically in the matter of Non-Taxable Tax Object Acquisition Value resulting in multiple interpretations concerning the implementation of land rights transfer through properties exchange, where the object matters are 1 land right in exchange for 2.

## **3.4 Title transfer process by the Indonesian National Land Institution**

In the process of application for land and/or building title transfer submitted to the National Land Institution, there are differences in the requirements demanded for individual persons and legal entities. The set required for personal Right of Ownership shall include the following: (a) Application form duly filled and signed by the applicant or his proxy on a stamp duty, (b) Authorization letter if the application is submitted by another person on his behalf, (c) Copies of National ID and Family Card which has been stamped as a true copy of the original by the land loket official, (d) the original Land Certificate, (e) the Deed of Properties Exchange made before an authorized Land Deed Official, (f) the original document(s) that furnish evidence of the rights transfer and full payment of the transaction, (g) copies of Notification of Tax Due for Tax over Land and Building, as well as payment slip of fees due for rights registration, (h) Income Tax and Acquisition Duty Payment Slips, (i) Statement Letter assuring there is no ongoing legal dispute involving the land parcel concerned, and (j) Statement Letter assuring the physical control of the land parcel concerned.

Meanwhile for legal entities, the above requirements remain with exception of the following additionals: the Deed of Establishment/Articles of Association made before a notary public, Ministry of Law and Human Rights Decision Letter on the

Establishment of Legal Entity eligible to apply for land rights, and the Permission Letter to Acquire Land Rights issued by the Head of National Land Institution [30]. The title transfer process will require about 5 or more working days, depending on the number of rights transfer/permohonan submitted at the same time to the National Land Institution local offices.