Indef: 12 Percent VAT Increase Potentially Hampers Indonesia's Economic Growth

JAKARTA - Center of Macroeconomics & Finance Economist Indef Abdul Manap Pulungan assessed that the plan to increase the value added tax (VAT) to 12 percent by 2025 has the potential to hamper Indonesia's economic growth.

"Indeed, when the tariff increase is taken (VAT 12 percent), the impact will be felt on the economy, so don't let the increase in VAT suppress economic growth," Abdul said in an Indef Public Discussion 'VAT Rises, People's Burden Rises' which was held virtually in Jakarta, quoted from Antara, Wednesday, March 20.

Abdul noted that in 2023 alone, Indonesia's economic growth had slowed to 5.03 percent compared to 2022 which was recorded at 5.31 percent.

According to Abdul, the increase in VAT will have an impact on people's tendency to be more frugal considering the rising prices of goods and services.

It is feared that this will further suppress the indicators of household consumption, which has been the main contributor to gross domestic product (GDP).

By 2023, household consumption levels have slowed to 4.82 percent compared to 2022 which was recorded at 4.9 percent.

Non-food components are predicted to be the consumption component most affected by the increase in VAT by 12 percent later, namely the transportation and communication group, as well as restaurants and hotels.

"Ini khawatirnya ketika VAT itu naik, orang-orang cenderung menahan Plesiran, yang pada akhirnya menyebabkan sektor-sektor konsumsi yang bukan kebutuhan dapat itu menurun," ujar Abdul.

Furthermore, he explained that the increase in VAT also has the potential to have an impact on inflation.

Although there are various commodities that are not subject to VAT, such as rice, corn, sago and other commodities, according to Abdul, there is no guarantee that the price of these commodities will be controlled in the market.

"The sellers will be reactive when there is an increase in VAT. They don't care whether the commodities that are declared not to increase actually increase, especially in traditional markets that are not monitored," he said.

These concerns are coupled with the global economic conditions this year which are still overshadowed by uncertainty.

Coordinating Minister for Economic Affairs Airlangga Hartarto previously confirmed that VAT would increase to 12 percent by 2025.

He said the rules for increasing VAT would be discussed further and implemented by the next government.

For information, the increase in VAT of 12 percent is one of the government's tax adjustments plans regulated in Law Number 7 of 2021 concerning Harmonization of Tax Regulations (UU HPP).

In the HPP Law, it is stated that based on Article 7 paragraph 1 of the HPP Law, the previous VAT rate of 10 percent was changed to 11 percent which was in effect on April 1, 2022, and again increased by 12 percent no later than January 1, 2025.

Article 7 paragraph 3, the VAT rate can be changed to a minimum of 5 percent and a maximum of 15 percent. However, said Airlangga, the adjustment of the regulation depends on the next government policy.