Indonesia braces for VAT hike as government signals green light amid public opposition

[JAKARTA] The Indonesian government appears poised to push ahead with a controversial hike in value-added tax (VAT) to 12 per cent from 11 per cent, starting January next year, with President Prabowo Subianto expected to confirm the decision next week.

Recent remarks from key officials in Prabowo’s administration, including Finance Ministry advisers and lawmakers, strongly indicate the increase will proceed despite widespread opposition.

Parjiono, special adviser to the minister of finance, stated this week that the hike aligns with existing laws mandating a VAT rise by 2025, and preparations are under way to roll out subsidies to mitigate its impact on public purchasing power which remains a “priority”. 

“We are still progressing in that direction, meaning the increase is set to proceed,” Parjiono said, according to local media reports.

Prabowo had previously announced a 6.5 per cent increase in the national minimum wage, with hopes that it would boost public purchasing power and help lift the economy.

Adding to the momentum, Kamrussamad, a Gerindra party lawmaker, confirmed that there have been no further discussions between the government and parliament about delaying the VAT hike, as the legislature is set to recess soon.

These remarks firmly signal that the policy is on track to be implemented as planned.

With the clock ticking, businesses and the public are already preparing for the financial ripple effects, with many companies notifying customers about the impending rate adjustment.

Bracing for a hit

As the impending VAT hike to 12 per cent looms, business service providers are taking proactive steps to prepare, notifying their customers of inevitable pricing adjustments.

Mandiri Sekuritas, a brokerage firm, has alerted its clients that transaction fees will increase to reflect the new tax rate, effective Jan 1, in accordance with the government’s policy.

Similarly, Google Ads has updated its tax information page for Indonesia, confirming that all sales will incur the 12 per cent VAT starting next year.

Juwita Trihapsari, the owner of a beauty salon in Jakarta, is gearing up to raise her service prices by up to 15 per cent from next year.

“This is a business risk I have to take,” she said, acknowledging the necessity of the price hike due to the rising wages she must pay her staff in line with the government’s new minimum wage regulations.

Mixed signals

The statement from the Ministry of Finance contrasts sharply with remarks made by National Economic Council chairman Luhut Pandjaitan last week, who suggested that the VAT increase might be delayed.

The proposed increase is seen as ill-timed, given that Indonesia is grappling with a challenging economic environment and weakening public purchasing power.

The hike, outlined in legislation passed in 2021 with backing from both the government and parliament, is part of a phased approach to strengthen the country’s fiscal framework.

The law initially raised the VAT rate from 10 per cent to 11 per cent on Apr 1, 2022, with a further increase to 12 per cent slated for Jan 1, 2025.

Covering the majority of goods and services, this measure is designed to bolster state revenues for economic recovery while promoting greater tax compliance nationwide.

Senior economist and government adviser Raden Pardede noted that cancelling the VAT increase would be challenging, as the plan is backed by constitutional law, even though it has faced considerable pushback from the public.

“There must be a strong argument if we want to delay or cancel it, and ultimately, it’s the highest authority – the president – who must make the final call,” he said in a briefing.

With Prabowo’s agenda to ramp up spending for economic growth, tax revenue is seen as a vital tool for the president to fund his ambitious budget plans.

In the 2025 Budget, the government aims to raise the tax revenue to gross domestic product ratio to 10.24 per cent, driven by an expected boost of up to 1,000 trillion rupiah (S$84.4 billion) from the planned VAT increase to 12 per cent.

The government insists that this VAT increase will not burden public purchasing power, as essential items such as rice, eggs and sugar are exempt from the hike. Key services such as healthcare, education and public transportation will also remain untaxed.

However, analysts contend that the VAT rise will still have a far-reaching impact, especially on the business sector, with potential ripple effects across the economy.

Jakarta-based think tank Center of Economic and Law Studies has raised concerns over the potential economic fallout from the planned VAT increase.

Its latest report said that the tax hike could shrink Indonesia’s GDP by as much as 65.3 trillion rupiah with household consumption expected to take a major hit, with a projected decrease of 40.68 trillion rupiah.

Bhima Yudhistira, executive director of the Center of Economic and Law Studies, argues that the lack of clarity and inconsistency in enforcing fiscal policies is making Indonesia’s investment climate less attractive compared with its neighbours.

Particularly as the year draws to a close and seasonal demand typically rises, business owners are seeking clarity to ensure proper budgeting and planning for the months ahead.

“With limited time remaining, this delay and inconsistency by the government have created numerous issues and dynamics that ultimately harm both consumers and businesses,” he said.