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Apindo: 12 percent VAT increase in 2025 could derail economic recovery

Jakarta Globe - May 16, 2024

Arnoldus Kristianus, Jakarta – The Indonesian Employers Association (Apindo) has raised concerns about the government's decision to increase the Value Added Tax (VAT) rate to 12 percent in 2025, warning that it will exert significant pressure on the economy.

This policy is being introduced at a time when the national economy is still in the process of recovering from the impacts of the COVID-19 pandemic.

"The policy to raise the VAT rate needs to be reconsidered as it will act as a fiscal disincentive, placing strain on an economy currently experiencing positive recovery trends. The government has the flexibility to adjust, depending on its willingness and fiscal policy orientation," said Apindo Economic Policy Analyst Ajib Hamdani on Wednesday.

According to Article 7, Paragraph (1) of Law Number 7 of 2021 on Harmonization of Tax Regulations (HPP), the VAT rate of 12 percent is scheduled to take effect no later than January 1, 2025.

However, the government also has the option to adjust the timing or delay the increase, similar to the adjustments made to the carbon tax policy despite its regulation under Article 13 of the HPP Law.

"Economic realities and conditions can be considered when formulating and implementing policies," Ajib explained.

In the 2023 State Budget, revenue from VAT and luxury goods tax reached approximately Rp 764 trillion.

"If the government raises the VAT rate to 12 percent, VAT revenue could increase by around Rp 80 trillion in 2025, assuming economic growth of around 5 percent and inflation at about 2 percent in 2024 and 2025," Ajib said.

The VAT increase will impact the national economy in two main ways: it will affect both businesses and consumer purchasing power. VAT is a tax imposed on end consumers, broadly affecting the general populace and putting pressure on their purchasing power.

"On the other hand, if businesses absorb the VAT rate increase into their cost of goods sold, it could reduce company profits and create negative sentiment towards business development," Ajib added.

The government should focus on a broader priority scale for state revenue, which includes taxes, excise duties, non-tax state revenues, and optimizing dividends from state-owned enterprises.

Previously, Coordinating Minister for Economic Affairs Airlangga Hartarto said the government is continually working to increase tax revenue. By 2025, under President-elect Prabowo Subianto, the 12 percent VAT rate is expected to be formalized in the 2025 State Budget.

Ahmad Heri Firdaus, a researcher at the Institute for Development of Economics and Finance (Indef), pointed out that if VAT officially becomes 12 percent, it will be the highest in Southeast Asia.

"It will be the highest, especially with a single-rate scheme, which will certainly burden consumers who spend 95 percent of their income on basic needs," Ahmad commented in March.

Currently, the Southeast Asian country with the highest VAT is the Philippines at 12 percent. Other countries, such as Cambodia and Laos, have a VAT of 10 percent, while Vietnam employs a two-tier system with rates of 10 percent and 5 percent. Malaysia uses a Goods and Services Tax (GST) system at 6 percent.

Source: https://jakartaglobe.id/business/apindo-12-percent-vat-increase-in-2025-could-derail-economic-recover