Monique Handa Shafira, Jakarta – The planned value-added tax (VAT) hike, set to take effect on January 1, may hinder national economic growth, which relies heavily on household consumption, an analyst warned on Wednesday.

The government intends to increase VAT by 1 percentage point to 12 percent next year to boost tax revenues, a crucial move to fund the programs of newly inaugurated President Prabowo Subianto.

However, Ajib Hamdani, an economist with the Indonesian Employers' Association (Apindo), cautioned that the VAT hike could backfire, negatively affecting both purchasing power and living costs.

Ajib said household consumption accounts for 60 percent of Indonesia's economic growth. Any decline in purchasing power, he argued, could significantly impact the national economy.

Speaking to the business channel IDTV, Ajib also questioned the timing of the proposed increase, noting that over 8.5 million citizens have experienced a decline in their economic status in the past five years.

"Public consumption has already slowed, as evidenced by five consecutive months of deflation since May," Ajib pointed out.

"The decision to raise VAT to 12 percent comes at a time when purchasing power is weakening and economic growth remains sluggish – it's poorly timed," he said.

In response, Apindo has urged the government to delay the VAT hike until the national economy shows stronger recovery and household purchasing power begins to improve, Ajib added.

He noted President Prabowo's ambitious goal of achieving 8 percent economic growth within the next three years, warning that the VAT increase could undermine this target.

"Strong economic growth requires robust purchasing power, but this hike will only discourage spending," he said.

Source: https://jakartaglobe.id/business/vat-hike-could-hamper-economic-growth-analys