Mitigating the Risks of Raising Indonesia’s VAT, from Detik.com
By Irwan Harefa, for Detik.com, December 23, 2024
JAKARTA — Beginning January 1, 2025, Indonesia’s Value-Added Tax (VAT) rate will officially rise to 12%, up from the current 11%. The (current) government claims it is emphasizing equity in the implementation of the increase by handing out a variety of tax incentives, including government funding for VAT for essential goods.
But the policy has ignited criticism and protests from the public, business owners, associations, and even members of Indonesia’s House of Representatives (DPR). Calls to delay the VAT hike have flooded social and traditional media. On platforms like X (formerly Twitter), hashtags like #tolakppn12% (reject 12% VAT) have trended, while consumer advocacy groups, such as the Indonesian Consumer Foundation (YLKI), have argued the policy would burden citizens already struggling with economic difficulties.
Opposition and Economic Concerns
Deputy House Speaker, Cucun Ahmad Syamsurijal (PKB-West Java II), has urged the government to reconsider the policy, citing three main concerns: reduced purchasing power, the slower national economic recovery, and a potential downturn in the retail, tourism, and industrial sectors.
Economic analysts and business leaders have also expressed skepticism, warning of inflationary pressures and the the flow on effects for production and distribution costs. In response, some have urged the adoption of “living frugally” next year, prioritizing basic needs over discretionary spending.
Widodo Government Legacy Policy
The VAT increase has been incorrectly attributed to funding initiatives of the in coming government of President Prabowo Subianto’s sworn in October 2024, such as the free lunch program for the nation’s children. However, the policy stems from a mandate established four years ago by Law No. 7/2021 Concerning the Harmonization of Tax Regulations (UU HPP), which set a schedule for raising the VAT rate: 11% in April 2022 and 12% by January 2025.
This law was passed long before the current government took office, making the policy unrelated to recent political developments. While calls for delaying the VAT increase are understandable, any postponement would require legislative approval and could disrupt the government’s 2025 budget revenue and expenditure assumptions.
Historical Context and Economic Indicators
Since Indonesia’s tax reform in 1983, VAT rates have ranged from 5% to 15%, however, the government has largely maintained a 10% rate for nearly 40 years. The increase to 11% in 2022 offers a precedent for understanding the potential impacts of the 2025 hike.
Despite the 2022 VAT increase, Indonesia’s economy grew, with household consumption rising, poverty rates declining, and GDP growth reaching 5.31%. While inflation climbed to 5.51%, it later fell back to 2.61% in 2023 and is projected to come in at 2.70% for 2024. These outcomes suggest that a modest VAT increase may not significantly hold back economic progress.
Essential Goods
The 2025 government budget includes extensive tax expenditures to manage the risks associated with the VAT hike. In 2022, these expenditures totaled IDR 341.1 trillion, and for 2025, they are projected to rise to IDR 445.5 trillion, with 60% allocated to VAT and luxury tax relief.
Key allocations include IDR 122.3 trillion for the manufacturing sector and nearly half (47%) directed toward improving social welfare, amounting to IDR 209.5 trillion. Measures are in place to ensure that essential goods remain exempt from VAT, reflecting the government’s need to shield vulnerable populations from too much financial pressure.
While the VAT increase is implementing legislative mandates, the government has prepared significant safeguards to balance fiscal responsibilities with public welfare, underscoring the challenge of balancing continued economic growth and the community’s needs. Irwan Harefa, S.E., M.Ak, is an official with the Ministry of Finance. The views expressed are his own.
This post is based on https://news.detik.com/kolom/d-7699959/mitigasi-risiko-kenaikan-ppn. Featured image credit: “Niscaya” [Certain] by Yos Suprapto – https://m.kumparan.com/hidayat-adhiningrat1500207974176/konoha-telanjang-di-pameran-yos-suprapto-249KDqp0170/full.
In earlier news…
Tax Administration versus Tax Rates: Evidence from Corporate Taxation in Indonesia
By M. Chatib Basri, Mayara Felix, Rema Hanna and Benjamin A. Olken, American Economic Review, vol. 111, no. 12, December 2021, (pp. 3827–71)
Abstract
We compare two approaches to increasing tax revenue: tax administration and tax rates. We show that when Indonesia moved top regional firms into “medium taxpayer offices,” with high staff-to-taxpayer ratios, tax revenue more than doubled. Examining nonlinear changes to corporate income tax rates, we estimate an elasticity of taxable income of 0.579. Combining these estimates, improved tax administration is equivalent to raising top rates on all firms by 8 percentage points. On net, improved tax administration can have significant returns for developing countries.
Excerpts
…The idea is that enhanced tax administration may make evasion and avoidance more difficult..
…Tax Administration Reform and the Introduction of MTOs.—Indonesia began
comprehensive reforms of its tax administration system in 2002, to improve fiscal balance in the wake of the 1997–1998 Asian Financial Crisis. This was the first year it transitioned to a modern, centralized IT system to handle all tax transactions. It also restructured the organization of its tax offices.The organizational reform had two main features. First, following typical practice worldwide (Lemgruber, Masters, and Cleary 2015), large corporate taxpayers were moved to centralized offices, with higher staff-to-taxpayer ratios to allow for more intensive followup. The largest 200 taxpayers nationwide would be serviced centrally by a large taxpayer office (LTO) based in Jakarta. Analogously, the top several hundred taxpayers in each region would be handled by a special MTO in their tax regions. All remaining corporate taxpayers, as well as all individual taxpayers, would be handled by the network of about 300 PTOs.10 We focus on firms serviced by MTOs and PTOs.11
Second, the office structure was also reformed. Prior to the reform, tax offices
were organized by tax type, such that taxpayers filed different taxes in different locations, and auditing was conducted by a separate network of audit offices (Brondolo et al. 2008)….Source
Basri, M. Chatib, Mayara Felix, Rema Hanna, and Benjamin A. Olken. 2021. “Tax Administration versus Tax Rates: Evidence from Corporate Taxation in Indonesia.” American Economic Review, 111 (12): 3827–71. DOI: 10.1257/aer.20201237
Featured image credit: Excerpt from Akiq AW, Indonesian family portraits series 2017, series of 18 inkjet prints https://digital.nga.gov.au/archive/contemporaryworlds/works.cfm%3Fwrkirn=326093.html
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