VAT Rises, Middle Class Is Getting More And More Declining

Photo By Andry Winarko (VOI)

JAKARTA The government will raise Value Added Tax or VAT from 11 to 12 percent starting January 1, 2025. This decision is based on the mandate of Law Number 7 of 2024 concerning Harmonization of Tax Regulations (HPP).

Minister of Finance, Sri Mulyani explained, the increase in VAT has been regulated in Article 7 paragraph (2) of the HPN Law, which states that the VAT rate of 12 percent will take effect no later than January 1, 2025. In addition, the Minister of Finance reasoned that an increase in VAT was needed for tax reforms and an increase in state revenues so that it is hoped that the APBN will be healthy.

"It's not blind, but the state budget still has to be maintained. I agree that we need to provide a lot of explanations to the public," said Sri Mulyani in a working meeting with Commission XI of the DPR at the DPR Building, Jakarta, Wednesday, November 13, 2024.

The government also argues that VAT rates in Indonesia are low when compared to developed countries such as the United States, Britain and Australia. However, the VAT rate of 12 percent is relatively large in Southeast Asian countries.

In comparison, Singapore and Thailand set the VAT rate at seven percent, while Vietnam, Malaysia, Laos and Cambodia at 10 percent. Myanmar only charges a five percent tariff, and Brunei Darussalam does not have VAT. If this increase is implemented, Indonesia will match the Philippines, which sets a tariff of 12 percent.

The increase in VAT immediately received rejection, given the depressed condition of Indonesia's economy. From data from the Central Statistics Agency (BPS), Indonesia recorded deflation for five consecutive months from May to September 2024. The details, 0.03 percent in May, 0.08 percent in June, 0.18 percent in July, 0.03 percent in August, and 0.12 percent in September.

This condition is considered by INDEF researcher Esther Sri Astuti to have a negative impact on the national economy. The reason is, the increase in VAT one percent has the potential to reduce economic growth by 0.02 percent, considering that production and consumption costs will increase which will ultimately weaken people's purchasing power.

In addition, this increase in VAT can also trigger higher inflation. Esther gave an example, when the VAT rate rose from 10 to 11 percent in April 2022, the inflation rate immediately jumped by 0.95 percent, which was most pronounced in food, beverage, and tobacco groups by 0.45 percent and transportation by 0.29 percent. If inflation increases again, people's purchasing power will be increasingly depressed. Their real income is reduced, while the price of goods goes up," he said.

Another impact that must be anticipated is the increase in the unemployment rate. The decline in consumption due to weakening purchasing power will reduce demand for goods and services. Consequently, the company will reduce production, which has the potential to lead to labor efficiency. This condition can exacerbate the employment situation, especially in the manufacturing and service industry sector," added Esther.

Researcher of the SMERU Economic Studies Institute, Luhur Bima, reminded the government that the increase in VAT will certainly be borne by one party in a business transaction. If those who bear sellers or entrepreneurs will reduce the profit margin and can have an impact on employees. Meanwhile, if it is borne by buyers, inflation will occur because the prices of goods and services will increase and cause people's living expenses to increase.

According to him, the community, especially the middle class, has the potential to feel the negative impact of rising prices for goods, which is a derivative effect of this increase in VAT. This is because the middle class does not receive social assistance from the government, which prioritizes poor groups.

"So far, there have been not many government instruments in supporting the welfare of middle groups who are very vulnerable to falling into poor groups when the prices of goods increase due to this increase in VAT," said Luhur.

Middle Class Becomes The Most Affected Group To Increase VAT

CORE Executive Director, Mohammad Faisal also emphasized that the impact of increasing VAT to 12 percent will worsen the current condition faced by the middle class. Because, with the current conditions, the increase in real wages has actually decreased, while the cost of living continues to increase even though inflation is low.

"Inflation is low because demand is also low. At the same time, if we look at savings in banks, which is below Rp. 100 million in their account, the average balance decreases. The account balance below Rp. 100 million is around 99 percent of the account holder," he said.

He said, when people are faced with additional living expenses, it is clear that income will be eroded. Especially the middle class that is the object. So that in conditions like this, domestic demand will be slower and the middle class will also decrease from the side of the spending level. In addition to the downward lending rate, automatically those who have savings will use their savings even more," explained Faisal.

Based on BPS data at the end of last August, the number of people entering the middle class for the last five years is known to have decreased. Indonesia's middle class proportion in 2024 was 47.85 million people lower than in 2019, which was 57.33 million people.

Meanwhile, the number of residents of the category towards the middle class continues to grow to reach 137.5 million people in 2024 while in 2019, the number is 128.85 million.

Researchers from CelIOS, Media Wahyudi revealed, the decline in the number of middle class in Indonesia does not mean that the group is upgrading. On the other hand, the decline was caused by their shift to the group towards the middle class. The number of middle class residents in the middle class is at the lower limit, so that when there is an economic shock, then those who go down to the poor group are those who are at the lower limit," he said.

He gave an example, people who have a salary of Rp. 2 million, who are no longer categorized as poor, but do not have access to social protection programs or receive subsidies, such as food assistance, education, and the like. Therefore, the middle class is the group that is most vulnerable if the increase in VAT has an impact on the economy.

The increase in daily costs is not balanced with an increase in wages as the main reason. So, it's like spending is greater than income so it's 'tight' or eating savings, "said the Media.

Referring to the same BPS report, middle class spending has increased in the last five years, among others, because it pays taxes and contributions, housing, education, and food. The expenditure of the middle class, especially for taxes or dues in 2024, is up 1.05 percent compared to 2019.

Illustration. (Photo: Doc. Antara)

"It's okay"

"It's okay"

"It's okay"

"It's okay"

The media emphasized that the middle class people experience things that may not be covered by BPS data. "Middle class is taxed continuously, they pay income tax, VAT (VAT) is no longer a tax that they have to pay every transaction in the field of education, health, but also those who are relatively small receive the benefits or incentives provided by the government," he added.

Prabowo Can Postpone The Increase In VAT For Political Stability

Law Number 8 of 1983 concerning Added Goods and Services Value Tax and Sales Tax on Luxury Goods first regulates the VAT rate of ten percent. The amount of this tariff can then be changed in accordance with government regulations, with a minimum limit of five percent and a maximum of ten percent.

This provision lasts quite a long time even though the law was revised in 2009. When serving as president, Joko Widodo made significant changes to the VAT rate through Law Number 7 of 2021 concerning Harmonization of Tax Regulations (UU HPP). According to the HPP Law, the VAT rate will be increased gradually. Starting April 2022, the VAT rate is set at 11 percent, then in 2025, the VAT rate will again increase to 12 percent.

Deputy Chairman of Commission XI DPR RI, Dolfie OFP said that the 12 percent increase in VAT in 2025 could be postponed without the need to change the HPP Law. The postponement can be done if President Prabowo Subianto feels that this is burdensome for the community.

He admitted that the increase in VAT to 12 percent in 2025 was mandated by Article 7 of the HPP Law. But the same law also stipulates that the government has the authority to change the VAT rate to a minimum of 5 percent and a maximum of 15 percent through the issuance of government regulations (PP) after discussions with the DPR.

"Don't forget, in paragraph (3) the law also states that based on economic development considerations and/or an increase in the need for funds for development, the VAT rate can be changed to a minimum of 5 percent and a maximum of 15 percent," explained Dolfie.

This politician from the PDIP faction revealed that Commission XI had questioned the plan to implement 12 percent VAT to Finance Minister Sri Mulyani Indrawati during the previous government period. At that time, his view said that the VAT decision was waiting for directions from President Prabowo Subianto.

"We have asked the time for the discussion of the 2025 State Budget, we have asked the government whether the 12 percent VAT rate is fixed or if we want to be lowered by looking at economic conditions? Answered at that time by the government 'we are waiting for directions from the new president'. So maybe until now there has been no new directive from the relevant president," said Dolfie.

Chairman of Commission XI DPR RI Misbakhun also emphasized that the decision to increase VAT to 12 percent in 2025 was fully submitted to the government. The reason is that before the law was knocked, his party had submitted various inputs.

"It's just the government, whether it considers declining purchasing power conditions, a decline in the middle class of almost 10 million. Is that a consideration? If the government doesn't make it a consideration, it means that the government still thinks that economic conditions are still stable, not affected, that's all, please. We leave it entirely as a government territory to decide whether the increase in VAT to 12 percent will be carried out in 2025 or not," he said.

Media Wahyudi also hopes that the government under President Prabowo Subianto will pay full attention to the middle class. This is because the Indonesian economy has the potential to collapse if the middle class experiences destruction.

Because there will be a lot of poor people next year. If there are more and more poor people, there will be more unemployment, more and more implications for layoffs. In the end, it is political stability. And when political stability is chaotic throughout the country, this will be a big problem going forward," he said.