The 12 Percent VAT Increase In 2025 Has The Potential To Worsen The Community's Economic Gap

JAKARTA - Director of Next Policy Yusuf Wibisono conveyed that the policy of increasing Value Added Tax (VAT) rates to 12 percent by 2025 has the potential to worsen the gap because VAT is more regressive than PPh and the poor bear a tax burden greater than the rich.

According to Yusuf, VAT is more regressive because it is paid when income is spent on goods and services at a single rate regardless of the level of consumer income.

"Therefore, every increase in VAT rates will have implications for the higher gap," he said in his statement on Tuesday, December 24.

He explained, from the estimated household spending in 2023, with an 11 percent VAT rate, poor consumers bear a tax burden of 5.56 percent of their expenses, while high-end consumers bear 6.54 percent.

Yusuf said that the almost even VAT burden shows that the increase in VAT to 12 percent will further suppress the purchasing power of poor and medium groups.

Meanwhile, based on the Next Policy simulation, it shows that the largest VAT burden is actually borne by the middle class.

From the estimated total VAT burden of IDR 294.2 trillion in 2023, around 40.8 percent or IDR 120.2 trillion will be paid by the middle class, which only covers 18.8 percent of the total population.

"Middle class who have experienced great economic pressure will be further eroded by this policy," he said.

Yusuf said the increase in VAT rates to 12 percent would also weaken the economic resilience of most people whose conditions are increasingly fragile, even the middle class who have high economic resilience.

Meanwhile, based on the post-increase in VAT rates from 10 percent to 11 percent in 2022, there was a decrease in the number of middle class people, of which in March 2021 there were 56.2 million people or 20.68 percent to 52.1 million people or 18.83 percent in March 2023.

"These middle class residents fell to a lower economic class with weaker economic resilience," he said.

Meanwhile, Yusuf said that the middle class candidate population jumped from 139.2 million people or 51.27 percent in March 2021 to 147.8 million people or 53.41 percent in March 2023.

Yusuf said, with the increase in VAT rates in 2025, it is certain that it will further suppress people's purchasing power which looks weaker, especially the middle class and the lower class.

According to him, the decline in people's purchasing power has weakened economic growth in recent years, especially after the increase in VAT rates to 11 percent in 2022.

"After growing 5.31 percent in 2022, Indonesia's economic growth will weaken to 5.05 percent in 2023. In fact, with the push for elections in 2024, growth is estimated to remain stagnant in the range of 5 percent," he said.

In addition, the increase in VAT rates will encourage inflation that will not be light.

"VAT applies massively to the majority of goods and services, so this tariff increase will put psychological pressure on the price of goods in general," he said.

Yusuf conveyed that basic necessities, health services, education services and electricity for household customers, which have been exempted by VAT, will now be subject to 12 percent VAT when viewed by the government as relatively luxurious.

"The pressure on the increase in VAT rates on the erosion of people's purchasing power is due to the large number of goods and services which are officially not basic needs but have empirically become the "principal needs" of the community and are affected by the increase in VAT rates such as clothing, soap, internet credit, to transaction services with electronic money," he said.

On the other hand, Yusuf said, the government plans to launch a stimulus package for welfare as compensation, including two months of rice assistance for 16 million families, a 50 percent discount on electricity rates for customers with a power of up to 2200 VA for two months, and a 0.5 percent final PPh extension for MSMEs until 2025.

"However, such limited and short-term compensation will certainly not be commensurate and sufficient to compensate for the permanent increase in VAT rates," he explained.

In addition, Yusuf also highlighted the provision of incentives to the upper class, such as VAT incentives worth IDR 15.7 trillion for the purchase of electric vehicles and the purchase of houses of up to IDR 5 billion, which is considered not in line with the principle of tax justice.

"The compensation provided by the government is not enough to cover the economic pressure that will be felt by the community due to this increase in VAT rates. In fact, the incentive policy for the upper class shows inequality in government policy priorities," he concluded.