December 17, 2024
JAKARTA – The government is proceeding with its plan of hiking value-added tax (VAT) to 12 percent at the turn of the year but has announced multiple incentives to soften the blow for consumers.
Coordinating Economic Minister Airlangga Hartarto said in a press conference on Monday that certain key staples, such as rice, beef, fish and vegetables, were exempted from VAT entirely.
“Following the Tax Harmonization Law, in accordance with the deadline that’s been set, the VAT rate next year will increase to 12 percent as of Jan. 1,” said Airlangga.
Three other staples, namely flour, industrial sugar and the state-distributed Minyakita cooking oil were technically subject to the 12 percent VAT rate, but buyers would not feel the effect immediately, as the government itself would initially cover the additional 1 percent, the minister explained, without specifying how long that arrangement would last.
The government also announced its intention to hand out 10 kilograms of rice per month in January and February to 16 million households categorized as poor.
A 50-percent electricity discount is also to be offered in the same two-month period for households connected to power supply of up to 2,200 volt-amperes.
Airlangga also said a partial VAT waiver on certain house purchases put in place in November 2023 would be extended to mid-2025, and then through to the end of the year, but reduced by 50 percent in the second half.
Tax incentives for electric vehicle purchases and income tax cuts for certain qualified workers are also to be rolled out with the VAT hike kicks in.
However, some items previously exempted from VAT will become subject to the sales tax, at the new 12 percent rate, starting next year, such as premium foodstuffs like wagyu beef, premium salmon and king crab.
VAT collection will also be expanded to services typically affordable only for the better off, such as international schools and premium health care, which were previously excluded along with education and healthcare services in general.
The head of the Finance Ministry’s Fiscal Policy Agency (BKF), Febrio Nathan Kacaribu, told reporters after the press conference that the fiscal stimulus package would cost the state some Rp 30 trillion to Rp 40 trillion (US$1.9 billion to $2.5 billion).
However, the state could rake in an estimated Rp 75 trillion from the VAT hike to 12 percent, said Febrio.
Speaking at the same presser, Finance Minister Sri Mulyani Indrawati revealed that the state could have collected as much as Rp 265.5 trillion in additional tax revenue from goods and services exempted from the hike.
She revealed that the country was projected to spend as much as 1.83 percent of its gross domestic product (GDP) for tax incentives in 2025, equal to Rp 445.5 trillion, a figure that had kept increasing since at least 2020.
Sri Mulyani went on to say that the VAT hike from 10 to 11 percent in April 2022 had not impacted the Indonesian economy much.
“Our economy remained relatively stable, there were even indications of improvement,” said Sri Mulyani about the 2022 hike, pointing to job creation, the growth of the formal sector, income tax collection and inflation as indicators supporting that conclusion.
Paramadina University economist Wijayanto Samirin told The Jakarta Post on Monday that the situation was different in 2022, however, as there had been “pent-up demand” amid the COVID-19 recovery, whereby people had “experienced shopping euphoria”.
“Right now, the world economy is slowing down, the Trump effect will take place and people’s spending power is weak. Incentives are needed to anticipate all of those [developments],” said Wijayanto.
He said hiking the VAT was far from ideal but “understandable” to secure fiscal revenue in the “difficult 2025 and 2026”.
Center of Economic and Law Studies (CELIOS) executive director Bhima Yudhistira told the Post on Monday that the VAT increase would have an “extraordinary effect” on people’s spending power that the incentive package could not cushion.
Citing a recent CELIOS study, Bhima said the middle class would have to spend an extra Rp 300,000 per month when the VAT rises to 12 percent, while the poor would still have to shoulder an extra Rp 100,000.
“The incentives that will be handed out are of a temporary nature, they’re not commensurate with the impact of the VAT increase to 12 percent,” said Bhima, contrasting the “long-lasting” increase with some of the stimuli set to be in place for only two months.
His main concern was that household spending, which accounts for the lion’s share of GDP in the archipelago, would eventually drop, with a knock-on effect on corporate revenue that could ultimately prompt mass layoffs.