JAKARTA: Indonesia will proceed with its value-added tax hike in 2025, while offering a raft of incentives to mitigate the impact on consumption and economic growth.
The government will hike the value-added tax to 12% from 11% next year as set in the law, Coordinating Minister for Economic Affairs Airlangga Hartarto said in a briefing on Monday (Dec 16). But it will keep exemptions on basic goods and services related to food, health, education, public transport and religious services, and bear the one percentage point hike on some staples such as government-branded cooking oil, industrial sugar and wheat flour.
The decision to push through with the VAT hike comes despite a public and political backlash from Indonesians struggling with weakening purchasing power and a spate of layoffs in the manufacturing sector.
Public outrage also escalated as the government floated the idea of a new tax amnesty, fueling perceptions that tax policy only burdens the lower and middle classes, while favoring the super-rich.
"We must keep the state budget healthy so that it remains a source of solutions, not a source of crisis,” Finance Minister Sri Mulyani Indrawati said in the same briefing.
According to a World Bank report launched on Monday, the various exemptions lead to loopholes that undercut Indonesia’s tax collections. Special regimes for VAT and income taxes also end up excluding as much as 99% of Indonesia’s firms.
That’s coupled with weak implementation, with Indonesia conducting fewer audits compared to countries with similar income levels. The World Bank estimates one in four firms commit tax evasion.
Consumption accounts for more than half of Indonesia’s domestic output and is a crucial growth engine for Southeast Asia’s biggest economy. Gross domestic product growth slipped to a one-year low of 4.95% in the third quarter, while inflation dipped further to the lowest rate in more than three years in November.
Still, suspending the VAT hike outright would risk eroding state revenues at a time when the government is preparing to ramp up spending on its priority projects.
VAT made up more than 25% of the country’s total tax receipts last year. Partial or full VAT exemptions for certain home purchases and electric vehicles will also be extended until next year, which could further deplete state coffers.
Premium items such as salmon, tuna and wagyu beef, VIP health services and international school fees will be removed from the exemption.
The cost of tax incentives is estimated to rise to 445.5 trillion rupiah (US$27.8 billion) or 1.83% of GDP in 2025 from this year’s estimated 399 trillion rupiah, Indrawati said.
Among other measures, the government will cover the income tax in labor-intensive sectors for employees with salaries below 10 million rupiah per month. A 0.5% final income tax for micro, small and medium-sized enterprises will be maintained through 2025.
From January to February, the government will also offer a 50% discount on electricity tariffs for some beneficiaries. Rice aid of 10 kilograms a month will be distributed to 16 million low-income households.
Indonesia set a fiscal deficit target of 2.53% of GDP for next year, reassuring investors that it will be kept below the 3% legal cap despite President Prabowo Subianto’s aggressive spending plans.
Next year, the country will begin rolling out its $30 billion free meal programme, renovate schools and set up free medical check-ups across the country, among other projects. - Bloomberg
