State Budget Deficit, Middle Class Strangled

The increase in VAT to 12% makes the people even more squeezed. (Andry Winarko VOI)

JAKARTA - The Prabowo Subianto government will increase the Value Added Tax (VAT) rate from 11% to 12% starting January 1, 2025. This policy is part of Law Number 7 of 2021 concerning Harmonization of Tax Regulations (UU HPP). Which regulates the gradual adjustment of VAT rates: from the original 10% to 11% on April 1, 2022, and then to 12% on January 1, 2025.

This tax increase was triggered by a drastic decline in state revenues amidst the continuing weakening global economic conditions. The government is currently also declaring a budget deficit. The Ministry of Finance (Kemenkeu) noted that the 2024 State Budget (APBN) experienced a deficit of IDR 401.8 trillion in November 2024, this deficit figure is getting wider compared to October 2024 which was recorded at IDR 309.2 trillion.

Meanwhile, Prabowo's government must fulfill campaign promises, such as the Free Nutritious Meals program, Food Self-Sufficiency Program, and Energy Security which require a large budget. Meanwhile, the Indonesian government is facing a global economic slowdown.

The increase in VAT rates is an effort to increase state revenue, which will be used to finance priority programs of President Prabowo Subianto's government. With this additional income, the government hopes to strengthen the budget for various important sectors, such as infrastructure, education, health, and other social programs.

According to a Tax Observer from Pelita Harapan University, Ronny Bako, the increase in PPH to 12% is applied on a limited basis to certain groups. He himself admitted that he agreed with the implementation, because it has become a law. So it must be implemented. For the implementation on January 1, 2025, according to Bako, the government must first prepare various accompanying regulations such as PP (Government Regulation), Kepmen (Minister of Finance Decree) and the decision of the Director General of Taxes if the derivative regulations are not ready, it means they cannot be implemented.

Because this has become a law, it must be implemented. Also if there are calls and movements outside, such as the Movement to Reject 12% VAT. According to Bako, they will face legal sanctions. "They can be charged under the Taxation Law, if they incite through social media they can be subject to ITE, and criminal law," said Bako, to Voi, contacted on December 22.

The amount of additional income will be greatly influenced by the level of public consumption and overall economic activity. However, considering that VAT is imposed on almost all transactions of goods and services, it will also have an impact on the community. In addition to the problem of decreasing consumption of luxury goods. The government must be prepared to face the hassle of implementing multiple tariffs. Because there will be different tariffs for the same type of goods.

The increase in the VAT rate to 12%, consumers need to pay tax of IDR 12,000 for every purchase of goods or services worth IDR 100,000, compared to IDR 11,000 at the previous rate. Although the difference seems small in individual transactions, in aggregate, this increase in rates is expected to make a significant contribution to state revenue. This increase can generate substantial additional revenue for the state.

The government has guaranteed that the 12% VAT rate increase will not target the lower classes, so it will not have a significant impact on people's purchasing power. In addition, certain goods and services, such as basic necessities and health services, will remain exempt from VAT to protect low-income groups.

However, considering that VAT is imposed on almost all transactions of goods and services, this rate increase is expected to still have an impact on people's purchasing power. Because it should be remembered that some goods and services that are not subject to VAT will still be objects of regional taxes and regional levies. So the increase in VAT will also have an impact on the lower classes.

The impact is mainly felt by the middle class who must immediately lower their welfare levels in order to survive and save. This policy will burden the middle class, suppress domestic consumption, and could pose a risk of inflation. According to the World Bank and McKinsey Research reports, the middle class has so far been the main driving force of the economy, because it contributes 55-60 percent of GDP (gross domestic product). However, the government still hopes that the imposition of VAT will make a significant contribution to state revenue.

However, until now there has been no official data and calculations that reveal the estimated additional state revenue from the increase in VAT rates.

According to Fajry Akbar, a tax observer from the Center for Indonesia Taxation Analysis (CITA), an increase to 12% for luxury goods that are limited PPnBM objects, the government will only get additional revenue of IDR 1.7 trillion.

Compared to the VAT increase being applied evenly, not only targeting luxury goods, the government could reap additional revenue of around IDR 70 trillion to IDR 80 trillion. But the government is implementing a limited VAT increase. So the results are still not significant.

According to Fajry, this is not effective from a budgetary perspective, therefore he suggests that it is better to cancel the increase. In addition, from an administrative perspective, it will also be troublesome for business actors, because there are two rates.

Some categories of luxury goods that are subject to luxury goods VAT include:

Luxury housing groups such as luxury homes, apartments, condominiums, town houses, and the like; Aircraft groups, except for state needs or commercial air transportation; Hot air balloon groups; Firearms and ammunition groups, except for state needs; Luxury cruise ship groups, including cruise ships, ferries, and yachts, except for state interests, public transportation, or tourism businesses. However, consumption of types of goods categorized as luxury goods is subject to PPH, such as premium food, such as wagyu beef, 3000-4000 watt electricity is also subject to PPH.

Due to the limited imposition of VAT this time, many parties doubt the effectiveness of this program. Because it was implemented partly on the grounds of protecting the poor. However, Ronny Bako sees that the 12% VAT increase will still have an impact on people's purchasing power.

For example, the imposition of electricity rates that will be imposed on the wealthy, 3000 watt and 4000 watt electricity groups, this electricity usually targets MSME businesses. Businesses with electricity that are taxed will usually affect the purchasing power of MSME products, which also has an impact on the purchasing power of the community. In fact, MSMEs are now the mainstay of the Indonesian economy, in addition to the impact of the implementation of high tariffs in the upper class triggering a decline in the business class who are flocking down to the MSME class.

With a projected additional income of around IDR 80 trillion, this step is expected to provide a wider fiscal space for the government to support development and public welfare programs. However, the success of the implementation is highly dependent on economic conditions and community tax compliance.

Policy Anomaly

However, in the midst of the current budget difficulties, the government must tax the elite. However, on the other hand, the government is considered ANOMAL, instead of saving, it has formed a new government organization with a fat organization, up to 48 ministries, not to mention the formation of new deputy ministers and agencies. This has raised wrong criticism from its counterpart, the PDIP party. Where it is considered a waste of state.

In fact, the government needs budget availability for various strategic programs, such as Free Lunch, Food Self-Sufficiency, and Energy Security, budget for IKN infrastructure and costs for regional expansion, which Prabowo wants to realize.

The Chairman of the PDIP Party DPP, Basuki Tjahaja Purnama, alias Ahok, stated that he rejected the increase in Value Added Tax (VAT) from 11 to 12 percent. According to him, the government took the wrong step. "When 'you need money', you should save, not strangle the people by setting VAT at 12 percent," he said during the A3 Podcast event.

According to Ronny Bako, there is actually an alternative to patching the budget, besides increasing the VAT tax to 12%. According to him, it can be done through the natural resources that we have, for example oil and gas, coal, and palm oil. "I think from there we can close the budget hole," he said.

But the condition is that the management must be fixed first. Before focusing on dealing with corruption, at least the existence of brokers in the supply chain must be fixed first. At least the Minister in that field, such as Bahlil Lahadalia and the Minister of Economy have the same spirit as the Minister of Agriculture Amran Sulaiman who wiped out the players around his ministry. According to Rony, he is sure that the budget deficit can be patched from that sector.