The planned tax hike is set to place Indonesia’s VAT – akin to the goods and services tax or GST – as the highest in the region. - AFP
JAKARTA: Lulu Cathelea has resolved to tighten her belt in 2025 by buying cheaper lunches and making her own coffee, as she frets over the imminent hike in Indonesia’s value added tax (VAT) to 12 per cent from 11 per cent.
The planned tax hike will jack up prices of goods and services across the board, hurt consumption and hit the middle class the hardest, economists say.
“With the VAT hike, I am prepared to downgrade my lifestyle. For instance, I will buy lunch at small food stalls instead of restaurants, and buy coffee in sachets instead of getting ready-to-drink coffee,” the 30-year-old cashier in an automobile showroom told The Straits Times.
The Jakarta resident is keen to continue to save a fifth of her monthly salary, which is slightly above Jakarta’s minimum monthly wage of around five million rupiah (US$315) for 2024.
Responding to mounting public concerns that the VAT hike is inflationary, a senior official on Nov 27 indicated that there would likely be a delay of several months from the original start date of Jan 1, 2025.
This is as the government prepares measures to counter the impact, including paying the electricity bills of middle- and lower-income households for a few months.
Indonesian President Prabowo Subianto delivered some good news on Nov 29, announcing an average 6.5 per cent increase in the national minimum wage for 2025 to keep up with living costs.
The planned tax hike is set to place Indonesia’s VAT – akin to a goods and services tax or GST – as the highest in the region, matching the Philippines’ 12 per cent.
The broad-based consumption tax will affect a wide range of consumer goods from instant noodles to household items such as soap and detergent, along with electronics, vehicles and properties, and services such as paid streaming of movies and songs.
Vendors from supermarkets to street stalls are expected to pass on the added costs to consumers.
Staple food items such as rice, eggs and sugar are not subject to VAT. Essential services like medical, education and public transport are also non-taxable.
Indonesia’s consumer price index – a measure of inflation – was at 1.71 per cent in October, from 1.84 per cent in September. But the core inflation rate, which strips out government-controlled prices and volatile food prices, rose to 2.21 per cent, the highest since July 2023, from 2.09 per cent in the previous month.
The impending VAT hike has exacerbated worries about the rising cost of living.
Shoe factory workers Regha Mandala Putra and his wife Yayat Solihat earn a total of 9.2 million rupiah a month, with about 700,000 rupiah spent on rent and utility bills. They also take care of their two-year old daughter and their parents.
“My wage is up only 0.64 per cent in 2024, while the VAT hike is higher than that. I totally object to it,” said Regha, 27, who is from Tangerang regency on the outskirts of Jakarta.
“The tax hike will certainly push up prices for a lot of our basic needs.”
National Economic Council chief Luhut Pandjaitan said on Nov 27 that there will likely be a delay in the VAT’s implementation.
“Yes, it’s almost certain to be postponed,” Luhut told reporters, as quoted by local media. “Before the 12 per cent VAT is implemented, we need to first give stimulus to those struggling economically.”
The government collected 694.8 trillion rupiah from VAT in 2022, which was raised by 1 percentage point to 11 per cent on April 1, 2022.
The VAT collection for 2023 amounted to 749.9 trillion rupiah, or 40 per cent of that year’s government tax revenue totalling 1.87 quadrillion rupiah.
The 1 percentage-point VAT hike to 12 per cent, if implemented from Jan 1, is projected to raise an extra 75 trillion rupiah for the government coffers for 2025.
The additional VAT revenue will be a boon for the Prabowo administration, which has laid out a slew of ambitious programmes such as free meals for children and pregnant women, free health screenings, and developing vast food estates in South Papua province to grow crops including padi and cassava to build food self-sufficiency.
On the flip side, the hike is expected to reduce household consumption by 40.7 trillion rupiah in 2025, with as many as 550,000 workers possibly being laid off should the higher tax be implemented from Jan 1, according to Jakarta-based think-tank Centre of Economic and Law Studies (Celios).
Businesses may be forced to lay off workers to counter shrinking sales and reduce their higher operational costs, the Celios report on Nov 28 noted.
Faced with a higher consumption tax, “the middle class may refrain from purchases of goods, or (will) buy goods on credit. They may also buy goods of lower quality or smaller amount”, its executive director Bhima Yudhistira told ST.
The middle-class segment plays an outsized role in Indonesia’s economic growth because, unlike most export-dependent countries, South-east Asia’s largest economy relies heavily on domestic consumption.
The 47.9 million people grouped as “the middle class” – in the world’s fourth most populous nation of about 278 million people – each spends between 2.04 million rupiah and 9.9 million rupiah a month.
Bhima said that consumers may also shift their purchases, from tax-paying retailers to unregistered and untaxed shops. This will expand the “shadow economy” and thus go against the government’s efforts to boost revenue.
Dr Mohammad Faisal, executive director of Jakarta-based think-tank Centre of Reform on Economics Indonesia, told ST the VAT hike is poorly timed, as the purchasing power of the middle class is shrinking.
“All indicators of the middle class’ purchasing power such as salary levels, purchasing levels and consumer confidence, are on the decline. The government really needs to wait for their purchasing power to rebound,” he said. - The Straits Times/ANN
