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Proposed VAT hike could stifle economic growth, warns Indef

Jakarta Globe - March 20, 2024

Arnoldus Kristianus, Jakarta – The Institute for Development of Economics and Finance (Indef) is worried that the proposed increase in the value-added tax (VAT) rate to 12 percent in 2025 from the current 11 percent could hamper economic growth, affecting both consumer consumption and investment.

"Under the business-as-usual scenario where the economy grows by 5 percent, the increase in VAT to 12 percent would reduce economic growth by 0.17 percent," said Ahmad Heri Firdaus, a researcher at Indef, during a public discussion in Jakarta on Wednesday.

According to Heri, based on Indef's analysis, the VAT hike would reduce competitiveness due to several factors. These include a projected inflation increase of 0.97 percent, a rise in investment costs by 1.2 percent, a decrease in national employment by 0.94 percent, along with an anticipated decline in exports by 1.41 percent and household consumption by 0.26 percent.

"This leads to a decrease in competitiveness. Therefore, it is necessary to consider using a multi-rate scheme, where essential needs are exempt from the VAT increase or perhaps even decreased," he said.

"Imports will increase as people opt for more affordable combinations of goods and services," he added.

Heri pointed out that the impact of the VAT hike would also result in a decrease in real wages due to rising product prices.

"With the VAT increase, there will be a decline in macroeconomic indicator performance," Ahmad Heri stated.

According to Ahmad Heri, the VAT hike triggers increased costs and slows demand. This is feared to lead to adjustments in production inputs, including adjustments in labor usage, potentially leading to a decrease in income tax.

"The potential aggregate tax revenue may not meet expectations due to a decrease in income tax," Ahmad Heri added.

Adhi S Lukman, Chairman of the Indonesian Food and Beverage Entrepreneurs Association (Gapmmi), said that the planned VAT hike would heavily burden the food and beverage industry and thus needs to be reconsidered.

"The government should rethink this, and I have proposed during meetings with the Ministry of Finance and the Directorate General of Taxes that if possible, the VAT for food should be lower, let's say around 7 percent or 8 percent," said Adhi S Lukman last week.

Adhi suggested that VAT should be applied to luxury (branded) products that are not essential for lower-middle-class society. This could compensate for the country's revenue from VAT on foodstuffs. He emphasized that increasing VAT on foodstuffs is highly sensitive and impacts the broader population.

"Raising VAT on food products should be carefully considered," he added.

According to Adhi, the purchasing power of lower-class society has decreased. They prioritize basic foodstuffs, resulting in less money available for secondary food purchases.

"If we look at the Central Statistics Agency data, the per capita expenditure of the population on food is quite significant, approximately 50 percent of GDP per capita, so Indonesians spend around 50 percent of their income on food and beverages," explained Adhi.

Tax revenue in 2023 reached Rp 1,869.2 trillion, exceeding the target set in the 2023 State Budget of Rp1,718.0 trillion

Value Added Tax (VAT) and Luxury Goods Sales Tax (PPnBM) were recorded at Rp 764.3 trillion, reflecting a growth of 11.2 percent. The realization reached 104.6 percent of the target.

Source: https://jakartaglobe.id/business/proposed-vat-hike-could-stifle-economic-growth-warns-inde