President Jokowi Plans VAT Increase to 12% by 2025, Ministry of Finance Aims for Improved Tax Revenue

President Joko Widodo, commonly known as Jokowi, has been proactive in planning for the future, as far back as 2021, particularly concerning the proposed increase in the Value Added Tax (VAT or PPN) rate to 12%, expected to take effect no later than January 1, 2025.

According to a report by Bisnis, the government intends to raise the current VAT rate of 11% to 12%. Airlangga Hartarto, the Coordinating Minister for Economic Affairs, emphasized that the responsibility for implementing the VAT rate hike will fall to the future administration.

“In observing the decisions made by the Indonesian people, it is evident that continuity is preferred. If continuity is the chosen path, then various government initiatives, including VAT policies, will be sustained,” stated Hartarto during a weekend media briefing.

The planned increase in the VAT rate to 12% is outlined in Law No. 7/2021 on Tax Regulation Harmonization (Tax Law Harmonization Act). This legislation, in Article 7 of Chapter IV, stipulates the latest provisions regarding the VAT rate. It specifies that the VAT rate will increase by 1% to 11%, effective since April 1, 2022.

Article 7, paragraph (1) of the aforementioned regulation, further states that “The Value Added Tax rate shall be 12% [twelve percent], which shall come into effect no later than January 1, 2025.”

In addition, President Jokowi has set the VAT rate at 0% for the export of Taxable Goods, Intangible Taxable Goods, and Taxable Services.

Moreover, the regulation allows for flexibility, permitting the VAT rate to be adjusted within a range of 5% to 15%.

It’s essential to note that any changes to the VAT rate, as mentioned above, will be regulated through government decrees following deliberation and agreement in the House of Representatives (DPR) during the formulation of the State Budget (APBN).

The Ministry of Finance underscores the significance of tax revenue, particularly in achieving Indonesia’s vision of becoming a developed and self-reliant nation by 2045, as outlined in Indonesia Emas 2045. The Ministry projects that tax reforms through the Tax Law Harmonization Act could potentially increase the tax ratio by 0.8% of GDP.

Despite these plans, the Ministry of Finance acknowledges that Indonesia’s tax ratio remains relatively low compared to other developing countries, standing at 10.9% in 2021, according to the OECD. This places Indonesia among the five lowest-ranked countries out of 28 Asia Pacific nations, trailing behind Malaysia and Thailand, with tax ratios of 11.8% and 16.4%, respectively.

To address this disparity, the Ministry of Finance aims to optimize its collection, as Indonesia currently captures only 63.58% of the total VAT revenue potential.

Furthermore, tax expenditure analysis reveals that VAT-related facilities account for 65% of total tax expenditure in 2019, highlighting the significance of VAT as a revenue source for the government.