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Indonesia’s government has made a significant shift in its tax policy for the new year, canceling a planned increase in value-added tax (VAT) on essential goods while imposing a VAT hike on luxury goods instead. This move aims to bolster state revenues while minimizing the financial burden on the general public, particularly the lower-income and middle-class segments.
New VAT Policy Details
Under the revised tax regulation, which was passed under the administration of former President Joko Widodo and enacted by current President Prabowo Subianto, the VAT rate has increased from 11% to 12%. However, the VAT increase will apply exclusively to luxury goods and services, including items like private jets, yachts, luxury homes, and cruise ships. This is a sharp contrast to the government’s initial proposal, which sought to impose the VAT hike across all goods and services except for essential items like rice, sugar, and eggs.
Exemptions for Basic Goods
A significant element of this new policy is that basic goods, including food items like meat, fish, vegetables, eggs, and fresh milk, as well as services like education, healthcare, public transportation, and drinking water, will remain exempt from VAT altogether. These goods and services will continue to be taxed at a 0% VAT rate, ensuring that there is no direct impact on the general population’s purchasing power.
President Prabowo emphasized that the goal of this VAT policy is to create economic equity, ensuring that essential goods and services remain affordable for the masses, while luxury consumers contribute more to the country’s revenue.
Government’s Rationale
Speaking at a press conference, Prabowo explained, “This tax policy is designed to prioritize the interests of the people, ensuring that there will not be any significant impact on their purchasing power.” The VAT hike on luxury items is expected to generate substantial funds for the government, which will be reinvested in national development projects, including infrastructure improvement and human resource development.
Experts agree that the government’s approach is a fair one. Krisna Gupta, a senior economist at the Center for Indonesian Policy Studies, lauded the decision to apply the VAT hike selectively to luxury goods. Gupta noted, “This approach will not impact the middle and lower classes while still generating necessary revenue for development.” He added that the focus on luxury items helps shield the economy from potential adverse effects on consumers’ purchasing power amid concerns about deflation and massive layoffs in labor-intensive industries.
Economic Implications
Indonesia has experienced record-low inflation, with the inflation rate slumping to 1.57% year-on-year in December 2024, marking the lowest level in the country’s history. Bhima Yudhistira, director of the Center for Economics and Law Studies, pointed out that the low inflation rate is indicative of a weakening consumer purchasing power, which the government is seeking to protect with this tax policy.
Despite the positive reception from many, the tax policy revision will come at a cost. The Indonesian government has acknowledged that by not applying the 12% VAT to all goods, the country will lose an estimated 75 trillion rupiahs (approximately $4.6 billion USD) in potential tax revenue. However, Suryo Utomo, Director General of Taxes at the Ministry of Finance, assured that the government would explore alternative sources of revenue to offset the shortfall.
Business and Economic Community Reactions
The Indonesian Chamber of Commerce and Industry (Kadin) also expressed support for the VAT policy. Arsjad Rasjid, Kadin’s chairman, noted that focusing the VAT hike on luxury items would help maintain domestic industries’ competitiveness and ensure that the retail sector remains buoyant. He added that this targeted approach will help ensure sustained economic growth while stabilizing the purchasing power of the middle class.
This decision follows growing concerns about the economy’s performance, especially after large-scale layoffs in industries affected by economic restructuring and deflationary pressures.
Looking Ahead
Indonesia’s move to cancel the VAT hike on basic goods, focusing instead on taxing luxury items, has been welcomed as a strategic decision to balance economic development with social responsibility. While the government will need to make up for the lost revenue through other means, the decision underscores a growing trend among Southeast Asian nations to adopt more targeted fiscal policies to protect vulnerable populations while raising funds for infrastructure and growth.
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