12 Percent VAT: New Burden for Middle Class

According to the World Bank and reports from research institutions such as McKinsey, the middle class in Indonesia contributes greatly to the growth of domestic consumption. Domestic consumption contributes around 55-60% of Indonesia's Gross Domestic Product (GDP). The middle class, with relatively stable purchasing power, is the main driving force. This shows that the middle class is the backbone of the Indonesian economy. However, the plan to increase Value Added Tax (VAT) to 12 percent in 2025 has the potential to become a new stumbling block. This policy, which initially only targeted luxury goods and services, now touches on secondary needs that are essential for many middle-class households.

Data from the Ministry of Finance shows that the increase in VAT will increase the price of goods by 0.9 percent. This impact seems small, but for the middle class whose income is stagnant, even the slightest increase narrows financial room for maneuver. According to Bank Indonesia's analysis, the trend in people's savings slowed to 15 percent in the last quarter of 2024. This figure is a signal that their purchasing power has been suppressed even before the new policy was implemented.

As reported by Netray, public sentiment towards the increase in VAT on social media also showed a negative reaction of 68 percent. Many have called this policy a step that is more burdensome than prosperous.

Luxury electronic goods, such as large-screen televisions and flagship smartphones, will be subject to 12 percent VAT. So will premium cars, jewelry, and exclusive entertainment services such as international concerts. However, sophisticated household appliances that are now essential needs are also affected, although not classified as luxury. On the other hand, VIP hospital services and international standard education are of concern because their rates will soar higher.

Not only consumers, business actors are also affected. The chairman of GAPMMI (Association of Food and Beverage Entrepreneurs of All Indonesia) said that the increase in VAT would increase operational costs, which would ultimately be passed on to consumers. The chairman of Aprindo added that domestic consumption has the potential to decrease by up to 20 percent, especially because the middle-class tends to reduce spending on non-essential goods.

Finance Minister Sri Mulyani emphasized that this policy still refers to the principle of justice. However, how is it fair if the middle class that supports domestic consumption has to bear the burden? Although state revenue is predicted to increase by IDR 75 trillion, the price that must be paid by the community is potentially greater: purchasing power is predicted to decline, consumption slows, and the potential for inflation increases.

Ironically, the government has not maximized tax revenue from the digital sector, which is worth trillions of rupiah. Reported from Bisnis, it was recorded that the realization of VAT revenue from trade through electronic systems (PMSE) or digital tax throughout 2023 was only IDR 6.76 trillion, while in the same year Bank Indonesia recorded e-commerce transactions reaching IDR 453.75 trillion. With a VAT rate of 11%, the potential for VAT revenue from PMSE last year was recorded at IDR 49.91 trillion. This means that there is a potential for uncollected tax of IDR 43.15 trillion.

The 12 percent VAT increase should be postponed. The government needs to comprehensively review its impact. Alternatives such as progressive taxes for high incomes or optimizing digital taxes are more feasible. In addition, providing targeted subsidies and fiscal incentives must be a priority to maintain people's purchasing power.

The 12 percent increase in VAT has an impact far beyond luxury goods. This policy burdens the middle class, suppresses domestic consumption, and raises the risk of inflation. We agree with the government's intention to increase state revenues, however, the government needs to find solutions that are not only creative but also fair. Although the target is the upper class, the middle-class, who are the driving force of the economy, must not pay too high a price.