Indonesia plans to increase the value-added tax rate from 11% to 12% starting next year to achieve fairness and increase state revenue. Although food, medical education, and public transportation are exempt, scholars worry that the increase in VAT will impact low to middle-income households, leading to increased expenses and potential living difficulties.
The Indonesian government will raise the value-added tax rate (VAT) from 11% to 12% starting next year. Coordinating Minister for Economic Affairs Airlangga recently stated that the new VAT rate will be implemented from January 1 next year, with exemptions for food items such as rice, beef, fish, and vegetables.
Additionally, the scope of VAT collection will expand to include services that only the wealthy can afford, such as international schools and high-end medical care.
Airlangga explained that adjusting the VAT rate is part of tax reform efforts aimed at ensuring fairness and increasing national fiscal revenue. To mitigate the impact on the public, the Indonesian government has introduced several subsidies, such as distributing 10 kilograms of rice to 16 million impoverished households and subsidizing electricity bills in January and February.
Indonesian scholars worry that the policy of raising VAT could affect Indonesia’s economy and impact low to middle-income households, potentially plunging their lives into difficulties.
The Jakarta Globe reported on the 18th that Bhima Yudhistira, the public policy director at the Center of Economic and Law Studies (CELIOS), stated that although the government and parliament claim the tax rate adjustment is a progressive policy and grant exemptions for staple commodities, many items purchased by low-income families are still subject to VAT.
According to statistics from the Center of Economic and Law Studies, after the VAT increase, the monthly expenditure of the poor population will increase by 101,880 Indonesian Rupiah (28 ringgit), and the monthly expenditure of the middle class will increase by 354,293 Indonesian Rupiah (98 ringgit).
Bhima pointed out that high VAT rates are quite common in economically stable high-income countries such as Norway, Denmark, and Germany, which have stronger purchasing power. In contrast, Indonesia's economic performance is weak, and increasing VAT will burden the public, especially the middle class.
He said, "Indonesia's issue is that the economic situation of the middle class is in distress. Frankly speaking, the government should compare with other ASEAN countries, (and it is evident) that Indonesia's VAT is the highest."
The executive director of the Center of Economic and Law Studies, Bhima, also stated that increasing VAT will affect the prices of various products, including electronics and auto parts.
He believes this policy will not significantly help government tax revenue but will reduce business turnover due to weakened purchasing power, thereby reducing other government tax revenues, such as corporate income tax and personal income tax.
Bhima worries that household spending, which accounts for the largest portion of Indonesia’s gross domestic product, may decline as a result, creating a chain reaction on corporate revenue and potentially leading to large-scale layoffs in the end.