OJK Says 12 Percent VAT Can Cause Economic Contraction

OJK Banking Supervision Chief Executive, Dian Ediana Rae (photo: dock. screenshot)

JAKARTA - The Financial Services Authority (OJK) through the Chief Executive of Banking Supervisory, Dian Ediana Rae revealed that the impact of increasing Value Added Tax (VAT) by 12 percent could lead to economic contraction.

Dian admitted that the actual policy of increasing VAT was the mandate of implementing Law Number 7 of 2021 concerning Harmonization of Tax Regulations. In its implementation, he said, the government is tentatively increasing VAT from 10 percent to 11 percent in April 2022 and will again collect it from 11 percent in early January 2025. Even so, he warned about the impact of implementing this 12 percent VAT in the future.

"The conditions for these adjustments will have the potential to create contractions in economic activity temporarily," said Dian, quoted on Saturday, December 14.

Previously, in the application of an increase in VAT from 10 percent to 11 percent, in the same time span, bank credit in December 2023 could still grow year on year by 10.38 percent. This was followed by maintained credit quality which was reflected in the NPL level which was at the level of 2.19 percent.

Then in October 2024, bank credit grew by 10.92 percent and NPL by 2.29 percent.

"In connection with the planned 11 percent increase to 12 percent in January 2025, it is undeniable that it will have the potential to disrupt people's purchasing power," continued Diian.

Meanwhile, in terms of supply, continued Dian, gradually, the impact of the policy will also affect the production cost component in order to maintain the products and services of business people so that they have an attraction for buyers.

Although warning about an economic contraction, Dian has not been able to conclude the impact of the 12 percent increase in VAT on the ability to pay credit debt by creditors.

Dian also ensured that the Government together with OJK and other regulators would always monitor economic indicators in order to encourage sustainable economic growth and stability.

"OJK will monitor through various policy mixes or stimuli needed to ensure the national financial system remains stable and maintained," said Dian.