The Indonesian government is set to increase the Value-Added Tax (VAT) rate from 11% to 12%, effective January 1, 2025.
This policy, mandated by the Harmonization of Tax Regulations Law, aims to boost state revenue, align Indonesia’s VAT rate with international standards, and reduce reliance on foreign debt.
Finance Minister Sri Mulyani confirmed the finalization of this policy, emphasizing its importance for fiscal reforms.
“So here (the 12 percent VAT), it has already been discussed with all of you (Commission XI of the Indonesian House of Representatives). The law is in place, and we need to prepare for its implementation (in January 2025),” she stated, as reported by Kompas.com.
Despite Its main goal, it begs the question of whether this policy can boost the overall economy and maintain stability or be a burden for the people of Indonesia, especially low-income households.
Behind the 12% VAT Hike: Why Indonesia is Making the Change
The primary reason for the VAT increase is to ensure the sustainability of Indonesia’s State Budget (APBN).
Finance Minister Sri Mulyani emphasized that a strong state budget is essential to navigate economic uncertainties and global geopolitical challenges.
She stated that increasing VAT is a key instrument to strengthen the budget while maintaining fiscal health.
“But (its implementation) should come with proper explanations so that we can proceed accordingly. Not recklessly, but ensuring the state budget (APBN) remains healthy,” Sri Mulyani said.
Furthermore, she highlighted that the decision to implement the 12% VAT rate underwent extensive discussions and careful deliberation between Indonesia’s legislative and executive branches.
The Drawbacks of Indonesia’s 12% VAT Hike
Amid global economic uncertainty, concerns are growing about the potential negative impacts of Indonesia’s VAT increase on livelihoods and businesses.
While the policy aims to enhance fiscal stability, critics argue it could weaken purchasing power and strain household finances.
The 12% VAT rate is expected to drive up the cost of goods and services, placing a heavier burden on low- and middle-income families.
This could significantly reduce consumer spending and widen the gap in economic inequality.
Augie Reyandha Giuliano, owner of Reynur Event Organizer in Bandung, highlighted the challenges for businesses. He explained that the VAT hike could cut into business revenues, making it difficult to maintain employee salaries.
“[For example], the budget for an event is Rp2 billion, including taxes. If the event is held every weekend—four times a month—the VAT increase to 12% would reduce revenue by Rp64 million each month,” Augie explained, as reported by BBC News Indonesia.
He also noted that this calculation doesn’t account for rising production costs, which further strain business budgets.
Small and medium-sized enterprises (SMEs) face similar challenges, with many struggling to manage higher operational expenses and compliance requirements. For some, this could erode profits to unsustainable levels, potentially forcing them out of the market.
Potential Benefits of VAT Hike
Despite the criticism and potential drawbacks, an increase in VAT does have benefits for the economy.
Primarily, the new policy is expected to boost state revenue, enabling the government to fund critical public services, infrastructure projects, and social programs.
This policy also reduces Indonesia’s reliance on foreign debt, ensuring greater financial independence.
By aligning its VAT rate with international standards, Indonesia strengthens its global competitiveness and modernizes its tax system.
The increased revenue will enhance fiscal stability, giving the government a stronger foundation to navigate economic uncertainties and global challenges.
Additionally, the funds generated could accelerate progress toward national development goals, including poverty reduction, better healthcare, and improved education.
This proactive approach reflects the government’s commitment to securing Indonesia’s financial health and supporting sustainable economic growth.
However, balancing these benefits with the potential drawbacks remains essential for successful implementation.
Source: Kompas.com, BBC Indonesia
Image: Kementrian Keuangan RI
