The uncertainty surrounding Indonesia’s Value Added Tax (VAT) increase has finally been laid to rest. Starting January 1, 2025, the VAT rate will officially rise from 11% to 12%, a move confirmed by the Coordinating Minister for Economic Affairs, Airlangga Hartarto. Despite the forthcoming hike, certain essential goods and services will remain exempt from the tax, providing some relief to consumers.
The decision to raise the VAT rate has been a subject of intense debate, drawing both support and criticism from various stakeholders. However, the government has ultimately decided to proceed with the increase, which is mandated by Article 7, Paragraph 1 of Law No. 7/2021 on the Harmonization of Tax Regulations (UU HPP). Airlangga emphasized that unless this law is amended or repealed, the VAT increase to 12% is inevitable.
“[The increase to 12%] is in accordance with the HPP,” Airlangga stated during a press briefing at the Central Office of the Directorate General of Taxes (DJP) in South Jakarta on Friday, August 16, 2024.
Finance Minister Sri Mulyani also weighed in on the issue, expressing her surprise at the widespread concern over the VAT hike. She argued that the increase would actually help protect the public’s purchasing power by ensuring that vital sectors such as basic necessities, education, healthcare, and transportation remain untaxed.
“People need to understand that while the VAT is set to rise from 11% to 12% as outlined in the HPP, essential goods and services will not be affected. This measure is designed to provide protection,” Sri Mulyani explained during a press conference on the 2025 State Budget on Monday, August 19, 2024.
Sri Mulyani further elaborated that the VAT exemptions will primarily benefit the middle and upper-income groups, who are the largest consumers of untaxed goods and services. She noted that the HPP Law does not specifically list which goods and services are exempt from VAT, as these details are covered in the Minister of Finance Regulation No.116/PMK.010/2017.
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Despite the government’s reassurances, the policy has drawn criticism from various quarters. The Indonesian Employers Association (Apindo) is one of the organizations urging the government to reconsider the VAT increase. Ajib Hamdani, an economic policy analyst for Apindo, warned that the tax hike could further weaken consumer purchasing power, which has already been declining.
“Millions of middle-class citizens have experienced downward mobility, as revealed by the National Socioeconomic Survey (Susenas) conducted by Bank Mandiri and the Institute for Economic and Community Research (LPEM) at the University of Indonesia,” Ajib said, highlighting the potential impact of the VAT increase.
Ajib also pointed out that household consumption accounts for approximately 60% of Indonesia’s Gross Domestic Product (GDP). He expressed concern that the VAT hike could undermine the ambitious economic growth targets set by the incoming administration of President Prabowo Subianto and Vice President Gibran Rakabuming Raka.
“If consumer purchasing power continues to decline due to counterproductive fiscal policies, the Prabowo-Gibran administration’s efforts to achieve aggressive economic growth targets will face significant challenges,” Ajib stated in his remarks on Monday, August 12, 2024.
The government’s decision to raise the VAT rate, while controversial, is seen as a necessary step to align with the HPP Law and ensure the country’s fiscal stability. However, the impact of this policy on the broader economy and the well-being of the Indonesian people remains to be seen as the new year approaches.
