Jakarta. A few years ago, the Finance Ministry launched the slogan “A wise man is someone who pays taxes” in a bid to boost tax compliance. At present, Indonesians are waiting for the government to make a wise decision as they are about to increase the value-added tax to 12 percent next month.

President Prabowo Subianto, who has been in office for almost two months now, recently announced he would proceed with the plan to raise the VAT from the current 11 percent to 12 percent starting in January. The updated tax was nothing new. The government first announced the increase on the 2021 taxation law, which was inked by his predecessor Joko “Jokowi” Widodo.

“The VAT is what the law has mandated so this is something that we have to do. However, the [12 percent VAT] will only selectively target luxury goods,” Prabowo said at the presidential palace in Jakarta just last week.

The retired army general, however, did not go into details on what the government would classify as “luxury goods”. It appears that the Prabowo government has been putting its thinking cap on to minimize the impact. A day prior to Prabowo’s announcement, the Indonesian leader consulted with senior lawmakers and his economic advisors. Mari Elka Pangestu, the deputy chairwoman of the National Economic Council, told the press that Prabowo wanted to “strike a balance” between raising the state revenue while maintaining the continuity of business and the people’s purchasing power.

The new VAT also came amidst Prabowo’s ambitious goal to increase the tax targets.

Prabowo aims to collect Rp 609.04 trillion ($38 billion) in VAT revenue from purchases of domestic goods and services throughout 2025. This marks a 23.46 percent increase compared to this year’s target of Rp 493.3 trillion.

Multi-Tariff Scheme
Senior lawmaker Sufmi Dasco Ahmad recently revealed that the government and the House of Representatives had agreed on a multiple-rate scheme for this VAT hike to avoid a disrupted tax revenue stream. The multi-tariff scheme will see luxury goods being subject to the 12 percent VAT while the current 11 percent VAT remains for other categories. Certain types of goods will even be VAT-free.

At present, some goods that are subject to the luxury goods tax include vehicles, luxury housing, air balloons, aircraft (except for state and commercial purposes), hot air balloons, and firearms (except for state needs), among others. The government has already exempted staple food and healthcare services from the VAT. According to Dasco, the government is considering lowering tax tariffs on goods and services that fall within the basic needs category.

If this multiple-rate VAT scheme enters into force, this will be the first time for Indonesia to take on such an approach. Botax Consulting Indonesia consultant Raden Agus Suparman said that this would be a milestone since Indonesia implemented the VAT in 1983. Raden said that this VAT had its advantages, citing that this would prompt the middle-upper class to pay higher taxes compared to other groups. Even so, he acknowledged that the multi-tariff VAT scheme had its own challenges.

“It blurs the line between luxury and general goods. Because there are times when the commonfolk buy luxury goods simply to climb up the social ladder,” Raden said.

Weakening Purchasing Power
Economist Yusuf Rendy Manilet warned against the possibility of certain goods being inappropriately taxed, especially if the government fails to come up with a clear taxation guideline for businesses. For instance, products that are supposed to be VAT-free accidentally got slapped with a 12-percent VAT. These sorts of mistakes might prevent the government from keeping the purchasing power in check.

Senior economist Esther Sri Astuti said that the multi-tariff scheme was the government’s attempt to find a middle ground amid public opposition to the VAT hike. She also doubts that the scheme could maintain the people’s purchasing power.

“The last time that Indonesia raised the VAT was back in 2022. The VAT rose from 10 percent to the current 11 percent, and the impact was clear. A single percentage point increase led to a 0.5 percent increase in inflation. This took a toll on people’s purchasing power and real income,” Esther said.

According to Esther, having the 12-percent VAT only applied to luxury goods does not mean that the other income classes are safe from the impact. About 11 million Indonesians have fallen out of the middle-class category over the past few months. People’s savings are shrinking, and the upcoming VAT is only expected to add another burden to low-income families.

It would be better for the government to wait until people’s purchasing power has improved before imposing the VAT hike, Esther said. The analyst also urged the government to not rely too much on VAT. She suggested that the government should focus on generating more income tax, particularly from high-income individuals. VAT currently makes up 30 percent of the state revenue, while income tax only contributes 5 percent. 

“If the government focuses on boosting income tax, it will be the high-income citizens that are affected. This is different compared to the VAT which will take a toll on all groups,” Esther said.

Another Burden on Businesses After Wage Hike

The private sector is heading to a very challenging year ahead. The government will raise the VAT, not to mention the upcoming 6.5 percent provincial minimum wage hike that will take effect next year. Businesses now have to brace for the impact of these policies.

“The 12 percent VAT is truly concerning, especially now that businesses have to comply with the minimum wage hike. We hope that the government can reconsider this hike and wait until things have become stable for the private sector,” Handaka Santosa, the chairman of the Indonesian Global Brand Retailers Association (Apregindo), said.

Handaka said that the upcoming VAT  could cause the production costs to soar. He even warned that the final price of the products could even increase by over 5 percent. This might cause people to hold back on spending and eventually affect sales performance. Businesses might have no choice but to close down some of their stores to reduce potential loss.

“It will be hard for businesses to stay afloat if they can’t achieve their sales target while they still have to pay the employee’s salary, rent, and electricity,” Handaka said. 

Better Seize Corruptors’ Assets
Roy N Mandey, the chairman of the Indonesian Affiliate Global Retailers Association (AGRA), said that Indonesia could get much more money seizing assets lost in corruption by passing the much-awaited asset forfeiture bill compared to the VAT hike. This key anti-corruption bill was first drafted in 2008 but has not seen any meaningful progress since then. It is even missing from the lawmakers’ priority legislation list for 2025.

“Assets stolen by imprisoned corruptors are even forecast to cover 50-60 percent of the state debts. If only we could ratify the asset forfeiture bill, we would probably no longer need to have the [12-percent] VAT,” Roy said. 

Roy said that a single percentage point increase to the VAT would only add between Rp 70 trillion and Rp 80 trillion in state revenue. This is only slightly more compared to the budget the government has set aside to run Prabowo’s flagship free school meal program, which will cost the state approximately Rp 71 trillion. 

The multi-tariff, 12-percent VAT will enter into force in three weeks from now. Only time will tell whether the government will actually proceed with the plan or suddenly decide to look for other sources of state revenue.

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Alfida Rizky Febriana, Arnoldus Kristianus, Basudiwa Supraja, Ichsan Ali, Juan Ardya Guardiola, Jayanty Nada Shofa, and Yustinus Patris Paat contributed to this story.