12 Percent VAT Policy Will Make Indonesia's Economic Growth Contracted

Rupiah (Photo: Antara)

JAKARTA - The Institute for Development of Economics and Finance (Indef) has the impact of the policy of increasing Value Added Tax (VAT) to 12 percent in 2025 on the Indonesian economy.

Executive Director of the Institute for Development of Economics and Finance (Indef) Esther Sri Astuti said that if there was an increase in VAT rates, it would have a very broad impact, ranging from contracting economic growth to imports that would decrease.

"We need to pay attention to the increase in VAT rates, which will make economic contractions. Not only in terms of consumption, but also exports, imports, and economic growth," he said in an Indef virtual discussion entitled Monetary and Fiscal Ketat, Daya Beli Melarat, Thursday, September 12.

Esther conveyed this based on Indef calculations in 2021 where if there was an increase in VAT by 12.5 percent, it would cause people's real wages to decrease by 5.86 percent, the JCI also contracted by 0.84 percent, GDP growth contracted by 0.11 percent, public consumption would slow down 3.32 percent, exports also contracted by 0.14 percent and imports contracted by 7.02 percent.

"This tariff increase makes the economy contract, meaning that the nominal wage will also decrease, meaning that real income will decrease, then from IHK inflation will contract to minus, then GDP or growth will also decrease, public consumption will decrease, exports and imports will also decrease," he explained.

According to Esther, at the time of the Prabowo Elected Presidential Government in January 2025, the VAT rate is planned to be increased to 12 percent, so the figure is approximately estimated from the previous Indef.

Previously, for information, based on Article 7 of Law No. 7 of 2021 concerning Harmonization of Tax Regulations (HPP), it was stated that the increase in VAT to 12 percent would apply no later than January 1, 2025, after the increase in VAT rates from 10 percent to 11 percent in April 2022.

Previously, Minister of Finance Sri Mulyani Indrawati opened her voice regarding the implementation of the Value Added Tax (VAT) policy to 12 percent as of January 1, 2025.

"The 12 percent VAT has also been discussed, including the political fatsun of the HPP Law, which we all discussed, have agreed but we respect the new government," he explained during a working meeting with Commission XI at the DPR/MPR Building, Jakarta, Tuesday, March 19, 2024.

According to Sri Mulyani, the new government has the right to change the policy that was previously agreed upon and could be adjusted to the directions and policies promised during the campaign.

"So if the VAT target remains 11 percent, it will be adjusted later," he explained.

In addition, Sri Mulyani said that she would design the 2025 State Budget according to the limits that have been regulated in the State Finance Law. Namely, the State Budget will be designed in the form of a baseline, meaning that it only contains mandatory and routine government spending. So that from this posture, there will be fiscal space that can be utilized by the new government in the first year.

"We will signal how big the fiscal space is," he said.