The VAT rate will be increased to 12% only for premium goods and services like private jets, yachts and luxury houses, President Prabowo Subianto said in a speech on Tuesday (Dec 31) after unexpectedly attending the yearend meeting of the finance ministry. - AFP
JAKARTA (Bloomberg): Indonesia scaled back its planned increase in the value-added tax rate just hours before it was set to take effect on January 1 amid escalating public outcry.
The VAT rate will be increased to 12% only for premium goods and services like private jets, yachts and luxury houses, President Prabowo Subianto said in a speech on Tuesday after unexpectedly attending the yearend meeting of the finance ministry.
All other goods and services will be subject to the current VAT rate of 11%, Prabowo said. The VAT exemption or 0% VAT granted for basic necessities will remain in effect, he added.
Indonesia had announced just two weeks ago that the VAT increase, which is already set in law, would proceed as scheduled in 2025. To help mitigate its impact on inflation and purchasing power, the government had offered to ramp up social aid for poor households and tax incentives for labor-intensive sectors. Those measures will still push through, according to Prabowo.
The last-minute revision would complicate Indonesia’s VAT framework just hours before the hike was supposed to take effect in the new year. Finance Minister Sri Mulyani Indrawati told reporters that the government would stick with a single tariff scheme, despite differing VAT rates applying to various products. Prabowo said that the government is still working on the technical details.
Criticism of the tax hike has continued to grow, with protests spreading across businesses, student and labor groups, opposition lawmakers, and among Indonesians on social media. They warned it would dampen already-weak consumption and manufacturing activity, and put the government’s 8% gross domestic product growth target out of reach.
The move will pose significant fiscal risks to Southeast Asia’s largest economy as VAT made up more than 25% of total tax receipts last year.
The government plans to extend tax incentives for certain home and electric vehicle purchases through 2025, which could further shrink its revenue stream.
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 Prabowo’s ambitious spending plans.
Next year, the country will roll out its $30-billion free meal program, renovate schools, build public housing and offer free medical check-ups, among other big-ticket projects. -- ©2024 Bloomberg L.P.
