A Tale of Two Laws: Navigating the VAT Uncertainty of Carbon Units in Indonesia's Emerging Market

Ministry of Finance, Republic of Indonesia

^* Corresponding author: rhezakz@gmail.com

Abstract

The establishment of Indonesia's carbon market marks a significant step towards achieving its Nationally Determined Contribution (NDC), yet it has simultaneously created a crucial legal dilemma regarding the Value Added Tax (VAT) treatment of carbon units. While Indonesian financial law explicitly classifies carbon units as “Securities” a category exempt from VAT—this position is challenged by the fundamental principles of consumption tax, which suggest a treatment as a taxable supply of services, similar to the approach in the European Union. This paper conducts a juridical-comparative analysis to deconstruct this dilemma. It examines the competing arguments: the “financial asset” view, supported by market infrastructure and securities law, versus the “taxable supply” view, supported by the asset's function as a compliance instrument and its final “consumption” upon retirement. The analysis reveals that this conflict stems from the dual nature of carbon units and the divergent regulatory objectives of financial versus fiscal authorities. The resulting legal uncertainty poses a significant risk to market development. This paper concludes that the resolution of this dilemma requires a deliberate act of regulatory reconciliation and recommends that Indonesia's financial and fiscal authorities collaborate to issue a harmonized regulation to provide unambiguous legal certainty for market participants.