Jakarta – In response to broad public opposition, a number of officials have suggested pushing back a long-planned value added tax (VAT) hike meant to kick in at the turn of the year. The brouhaha is overblown.

For a start, the money we pay in taxes does not evaporate but gets used, and hopefully for the benefit of the public.

Anyone who supports President Prabowo Subianto's flagship free meals program should understand the need for additional tax revenue in one form or another, because even a free meal costs money, let alone tens of millions served daily to schoolchildren, breastfeeding mothers and pregnant women.

Furthermore, most people will barely feel the one-percentage-point increase, as it impacts their spending power much less than things like inflation and wage growth, or the lack thereof.

Speaking of inflation, consumer prices rose just 1.55 percent in November, the lowest rate in more than three years, which makes this an opportune time to introduce a higher VAT rate.

Finally, to keep basic necessities affordable, key staple food items are exempt from VAT in Indonesia, including rice, eggs, fresh milk, several vegetables and fresh meat.

Finance Minister Sri Mulyani has defended the measure as necessary under a plan to gradually hike the VAT rate from 10 to 15 percent over a period of several years.

Fifteen percent would still be low compared with many other countries, as noted by the Organization for Economic Co-operation and Development (OECD), which recommended increasing tax collection in Indonesia to improve public services.

Better and more affordable education and health care, for example, require more tax resources, and such a move would particularly benefit people who cannot afford private services.

As a tax, VAT has several things going for it.

It is less prone to evasion. Individual or corporate taxpayers can use all sorts of trickery to reduce their burden by pretending to be worse off than they really are, but if they want that new television or need to procure industrial inputs, they will pay the tax, whether they like it or not.

Also, it generally discourages private consumption. While that sounds like a terrible idea in an economy that relies heavily on household spending, money kept in the bank instead of being used for instant gratification, often with foreign-made goods, can strengthen domestic manufacturing and exports in the long run.

The reason why many are upset about the VAT plan could be that the hike comes while the government is mulling over another tax amnesty.

Indeed, increasing the tax burden for the general public while letting some super-rich off the hook yet again is not a good look.

The basic concept of a tax amnesty is that it is offered once, and that anyone failing to avail themselves of the chance to come clean about hidden assets is then subject to harsh law enforcement.

Running such a program twice or even three times defeats that purpose, and the pragmatic argument for a quick state revenue boost seems insufficient justification for a policy that is not ethically justified, no matter how strongly the government insists that this is really – really – the last time.

The problem, of course, is that cross-border prosecution of tax crimes is severely limited, but that changes little about the public perception that the well-off are not pulling their weight.

That has implications for tax compliance in general, because people will be more inclined to dodge taxes if they feel others are not paying their fair share.

Another factor impacting tax compliance is people's perception of the state apparatus.

Empirical studies have found taxpayers to be less motivated to pay taxes if they have the impression that public funds are misused or mismanaged.

It is vital for the government to be transparent and accountable to dispel such concerns.

Middle-class consumers, who spend a particularly large share of their income on VAT-taxable items, must be reassured that they get their money's worth in terms of goods and services provided by the state.

Source: https://www.thejakartapost.com/opinion/2024/12/03/vat-the-equitable-tax.htm