Alfida Rizki Febrianna, Jakarta – The government's assurance that a higher value-added tax (VAT) will apply only to luxury goods, and thus spare low-income families, is being met with skepticism by some analysts.
President Prabowo Subianto has confirmed that his administration will impose a hike in VAT from 11 percent to 12 percent starting on January 1 but the hike is limited to luxury goods and services.
While the government intends to limit the VAT increase to products classified as luxury items, critics argue that this approach could still send ripples through the entire economy. For instance, if motor vehicles are deemed luxury goods subject to a 12 percent VAT, higher transportation costs could ultimately raise the prices of basic necessities – like rice – that are otherwise exempt from VAT.
Achmad Nur Hidayat, an economic and public policy expert at National Development University (UPN) Veteran Jakarta, said the increased VAT rate not only directly affects wealthier households but also indirectly burdens middle- and lower-income groups.
"The VAT hike on luxury goods will have a ripple effect on those with lower incomes," Achmad said on Sunday. He explained that this so-called "spillover effect" occurs when rising prices for luxury goods push up overall living costs.
"For example, an increase in the VAT rate on vehicles will elevate logistics and transportation expenses, leading to higher prices for daily essentials," Achmad noted.
He also noted that many lower-income workers are employed in sectors supporting luxury goods consumption. As demand for these goods declines due to the higher tax rate, their jobs could be at risk. The middle class, often the backbone of the national economy, may likewise struggle if they see rising costs for services and products linked – directly or indirectly – to luxury goods.
"When prices increase, the purchasing power of the middle class weakens," Achmad said. "Their everyday expenses rise, leaving less room for saving or investing. This dynamic can slow social mobility and hamper economic growth."
Business tycoon Handaka Santosa, chairman of the Indonesian Global Brand Retailers Association (Apregindo), underscored how a seemingly modest VAT increase can have outsized effects on final product prices.
"A pair of trousers priced at Rp 200,000 now costs Rp 222,000 with the current 11 percent VAT," Handaka said. "A one-percentage-point VAT hike might seem minor – just an additional Rp 2,000 – but that's misleading. Each component of the trousers – fabric, yarn, zipper, buttons – incurs VAT. After the cumulative effect, the final price could jump to Rp 250,000 rather than just Rp 224,000."
These concerns suggest that even a targeted VAT increase on luxury items may ultimately strain lower-income households, challenging the government's assertion that the new policy will shield the most vulnerable segments of society.