12% VAT in Indonesia – The Indonesian government is firm in its decision to increase Value-Added Tax (VAT) to 12% starting January 2025. The Ministry of Finance has confirmed its readiness for the policy’s implementation, sparking heated debates across various sectors. While this move is designed to boost state revenues, concerns about its impact on purchasing power and small businesses are growing. What will this change mean for Indonesia’s economy, and how can businesses adapt?

Value-Added Tax is a levy applied to every sale of goods or services by Taxable Entrepreneurs (PKPs). Though the end consumers bear the tax, PKPs are tasked with collecting, reporting, and remitting it to the government.

The increase is part of a planned progression outlined in Article 7, Paragraph 1 of Law No. 7 of 2021, initiated under President Joko Widodo’s administration. VAT was previously raised from 10% to 11% on April 1, 2022, with the final step to 12% scheduled for January 1, 2025.

Finance Minister Sri Mulyani Indrawati defended the decision as fulfilling a legal mandate. “We need to prepare for the (VAT increase to 12%), but it must be communicated properly,” she stated during a parliamentary session with Commission XI on November 13, 2024.

Once implemented, the new rate will place Indonesia among ASEAN countries with the highest VAT levels.

Concerns Over the 12% VAT Increase

The announcement has drawn significant backlash, especially on social media. Critics argue the hike will weaken consumer purchasing power, reduce company revenues, and potentially affect employee wages.

During her explanation to Parliament, Minister Sri Mulyani clarified that the policy was carefully crafted to support the State Budget (APBN). “This decision is not made blindly; it’s for the sake of fiscal sustainability,” she remarked.

However, economists remain cautious about the ripple effects. The Institute for Economic and Social Research (LPEM FEB UI) revealed that the VAT increase could disproportionately burden low-income households.

You may be interested: Why Sworn Translators Are Essential for Indonesia’s Legal and International Affairs

In its Indonesia Economic Outlook 2025 report, LPEM FEB UI highlighted that households in the lowest income bracket currently allocate an average of 3.93% of their spending to VAT, while higher-income groups spend 5.04%. These figures are expected to rise significantly with the 2025 increase.

Businesses, particularly small and medium enterprises, are also apprehensive. Tauhid Ahmad, a senior researcher at the Institute for Development of Economics and Finance (INDEF), warned that the hike could stifle economic growth. “The increase from 11% to 12% will raise production costs. When passed on to consumers through higher prices, this will inevitably reduce spending, causing a domino effect on the economy,” he explained on November 15, 2024.

Government’s Justification for the 12% VAT Increase

The government justifies the VAT hike as a means to boost state revenue, fund infrastructure projects, and reduce reliance on debt. As one of the main revenue sources, VAT plays a crucial role in financing government programs, particularly in the post-pandemic era when fiscal needs have grown significantly.

The adjustment also aims to align Indonesia’s VAT rate with international standards. The global average VAT rate, including OECD countries, is approximately 15%.

Read also: President Prabowo Asserts Indonesia Will Develop Its Own Nuclear Reactors

Notably, certain goods and services remain exempt from VAT, such as basic necessities, healthcare services, and education.

Quoted from Antara, while the VAT increase could pose challenges, the government views it as an opportunity to improve the overall tax system.

For instance, enhancing VAT refund mechanisms for micro, small, and medium enterprises (MSMEs) is one proposal. By leveraging digital technology, the government could create a faster, more transparent, and accessible refund system, alleviating the burden on MSMEs and encouraging tax compliance.

Additionally, measures to address the regressive nature of VAT—where everyone pays the same rate regardless of income—should be considered. Support programs for vulnerable groups and incentives for businesses could help minimize the policy’s adverse effects.

Balancing Opportunities and Challenges

The upcoming VAT increase to 12% is a pivotal policy shift with wide-ranging implications. On the positive side, it could strengthen fiscal stability and fund crucial infrastructure projects. On the downside, reduced purchasing power and increased costs for businesses pose significant challenges.

The government must balance this policy with supportive measures, particularly for small and medium enterprises, to avoid economic stagnation. Meanwhile, businesses need to adopt adaptive strategies to remain competitive in the changing landscape.

If you are a business owner seeking to navigate these changes, Bizindo is here to help. We offer expert consulting services, licensing assistance, and financial solutions tailored to your needs. Contact us today to ensure your business thrives amid Indonesia’s evolving economic policies.