VAT Increases To 12 Percent In 2025, The Government Must Anticipate Its Impact On The Economy

Center of Reform on Economics (Core) Indonesia economist Yusuf Rendy Manilet. (Photo: ANTARA)

JAKARTA - The government plans to increase the Value Added Tax (VAT) rate to 12 percent by 2025, as a way to increase state revenue.

However, this decision is predicted to affect people's purchasing power, especially for the lower middle class, which has the potential to slow down household consumption and disrupt domestic economic growth.

Indonesian Center of Reform on Economics (Core) economist Yusuf Rendy Manilet assessed that the increase in Value Added Tax (VAT) rates that occurred in 2022 did indeed provide a significant addition to state revenues.

However, Yusuf said, from a wider perspective, this tariff change also has the potential for negative impacts that can affect the national economy, especially in certain groups of people.

"The increase in VAT rates can also have a contradictory impact, meaning that the increase in tariffs at an inappropriate momentum will actually have an effect on the economy itself," he told VOI, Thursday, November 28.

According to him, the increase in VAT rates at the wrong time could increase pressure on the economy. One of them is the impact on people's purchasing power.

Yusuf explained that when inflation was increasing, the additional burden of increasing VAT could worsen the condition of lower middle class groups who had not received much assistance from the government.

"The increase in VAT rates can have an impact on people's purchasing power when the pressure from inflation changes occurs. Especially if this inflationary pressure is exposed to class groups who in general have not received much assistance from the government, in this case, for example, the lower middle class," he explained.

Yusuf said that if the group was affected by the increase in VAT, there would be an adjustment in consumption in response to changes so that it would also affect changes in household consumption in general.

He said, the change in household consumption was because this group held a proportion of around 70 percent to 80 percent of total consumption as a whole.

Yusuf said, if household consumption is distorted from the impact of the increase in VAT, the impact could be widespread, affecting the entire domestic economic sector, including the achievement of economic targets that the government wants to achieve in the years to come.

"We understand that household consumption will or will still be the post with the largest contribution in the domestic economy. When consumption of this household is then disrupted or slow down, of course, this will also have an impact on economic growth in general," he said.

Yusuf said that from the data in the last two to three years, it shows that although household consumption continues to grow, the growth rate is relatively slow.

This can be indicated by the decrease in people's purchasing power which has not yet fully received sufficient stimulus from the government.