Indonesia Faces VAT Hike Pushback Amid Economic Uncertainty
Indonesia is bracing for a
contentious January 1st tax change, as a legislated increase in the value-added tax (VAT) rate from 11% to 12% draws criticism from businesses and labor groups alike. While the government maintains that the increase, previously approved in 2021, is crucial for bolstering the national budget, concerns are growing about the potential impact on an economy struggling to regain momentum.
Economic Headwinds Complicate Timing
Critics argue that the timing for the VAT hike is ill-conceived, coming at a time when Indonesia’s economic growth appears stalled around the 5% mark. Consumption is weakening, largely due to a shrinking middle class, and uncertainty looms over global trade relations.
“We must be wise and thoughtful. We cannot look at the short term, but look at the impact for the next 2 to 3 years,” Jemmy Kartiwa, chairman of the Indonesian textile association, told reporters.
The urgency of these concerns has led the Employers’ Association (Apindo) to directly appeal to President Prabowo Subianto, urging him to pause the VAT increase.
Ex exemptions and Past Impacts Fuel Apprehensions
The VAT increase will affect a broad range of goods and services. Staple foods and items related to education and health care, however, will remain exempt. Nevertheless, small businesses are particularly apprehensive. They point to past VAT hikes that resulted in increased operating costs and a decline in sales, as budget-conscious consumers cut back on spending. One association representing small food stalls reported a
10% drop in sales following previous VAT changes.
Labor Groups Threaten Protests
Labor groups are calling for a complete cancellation of the VAT increase, warning of imminent protests should the government proceed.
“The declining purchasing power will worsen market conditions, threaten business continuity, and increase the possibility of layoffs in various sectors,” Said Iqbal, president of the Indonesian Trade Union Confederation (KSPI), expressed in a statement. Spokespersons for labor unions contend that the hike will deepen social inequalities and disproportionately burden workers.
Government’s Stance and Countermeasures
Acknowledging the concerns, the government is exploring ways to mitigate the impact of the VAT increase on vulnerable populations. Presidential economic adviser Luhut Pandjaitan has indicated that assistance programs to help low-income households cover electricity bills are being considered.
Moreover, in an effort to stimulate the tourism sector during the year-end holidays, the government announced a temporary 10% reduction in domestic airfares.
Meanwhile, state lender Mandiri has projected a minimal impact on overall economic growth, forecasting a reduction of only 0.05 percentage points in GDP growth next year. Inflation is anticipated to rise by 0.3 percentage points in 2025 due to the VAT hike. Their overall forecast for next year predicts GDP growth of 5.13% and inflation of 3.43%, factoring in the VAT rise.
The coming months will undoubtedly see intensified debate as the VAT increase draws closer. The government’s ability to balance its fiscal needs with the concerns of businesses and workers will be a crucial test of its economic stewardship.
Will the VAT hike hurt small businesses?
## Indonesia VAT Hike: A Recipe for Economic Trouble?
**Intro Music**
**Host:** Welcome back to “Indonesia Today.” We’re discussing a controversial tax change set to take effect January 1st: an increase in Indonesia’s Value Added Tax (VAT) from 11% to 12%. Joining us to delve into the potential impact of this decision is Economics Professor Adi Pranoto from the University of Indonesia. Professor Pranoto, welcome to the show.
**Professor Pranoto:** Thank you for having me.
**Host:** Professor, as you know, the government says this VAT hike is essential to bolster the national budget. But critics are voicing strong concerns, particularly given the current economic climate. Can you elaborate on these concerns?
**Professor Pranoto:** Indeed, the timing of this increase is questionable. Indonesia’s economic growth is struggling to reach 5%, consumption is weakening, and the global trade outlook is uncertain. Adding a VAT hike to this mix could further dampen consumer spending and business investment. As we’ve seen in past VAT increases, small and medium enterprises often bear the brunt of these measures, facing higher operating costs and reduced demand for their products.
**Host:** So you see this VAT hike potentially hurting small businesses and slowing down the economy?
**Professor Pranoto:** Precisely. While essential goods like food staples and education are exempt, many other essential items will become more expensive. This will disproportionately affect lower and middle-income households, leading to a decrease in their purchasing power.
**Host:** What about the argument that the government needs this revenue to fund important public services?
**Professor Pranoto:** That’s a valid point. The government needs revenue, but raising taxes during an economic slowdown is rarely the most effective solution. It’s crucial to find a balance – perhaps exploring alternative revenue sources or streamlining government expenditure before burdening citizens with additional taxes, especially in these uncertain times.
**Host:** We’ve heard calls from business groups urging the president to reconsider this decision. Do you think there’s a chance the government might delay or even cancel the VAT increase?
**Professor Pranoto: **It’s certainly possible. Ultimately, the government needs to weigh the potential benefits of increased revenue against the potential risks to economic growth and social welfare. Public pressure is mounting, as evidenced by the appeals from business associations and industry leaders.
**Host:** A difficult decision indeed. Professor Adi Pranoto, thank you for sharing your insights with us today.
**Professor Pranoto:** It’s my pleasure.
**Host:** And thank you for tuning in to “Indonesia Today.”
**Outro Music**