Did or Didn’t Indonesia’s VAT Rise to 12% on 1 January 2025? Government Presents Incentive Policy Packages
There was some confusion about the government’s plan to raise the value-added tax (VAT) rate from 11 percent to 12 percent. Based on Law Number 7 of Year 2021 on Harmonization of Tax Regulations (specifically in Article 7), a one percentage point VAT hike from 10 to 11 percent materialized on 1 April 2022. That law also ordered for another one percentage point hike (to 12 percent) on 1 January 2025, the latest.
Based on statements of government officials and society’s experience with the VAT hike in April 2022, it was assumed that essentially all (formal) products and services would be subjected to this new 12 percent VAT rate per 1 January 2025. However, a last-minute decision (on 31 December 2024) seems to have changed earlier plans.
Earlier, Indonesian Finance Minister Sri Mulyani Indrawati said in a hearing with the House of Representatives' Commission XI that tax policies, including the higher VAT, have been carefully designed, taking into account the health sector and basic needs of the people, while emphasizing the importance of keeping state budgets "healthy" to address potential financial crises and ongoing global geopolitical tensions.
This higher VAT rate is part of (a series of) fiscal reforms targeted at boosting state revenues and to support ongoing public social and economic development projects, such as (soft/hard) infrastructure, health care, and social protection. Being a large emerging economy while also enjoying robust economic growth, it means Indonesia faces ever-growing public spending needs.
Besides the existing social and economic development programs that are financed through annual State Budgets, Indonesian President Prabowo Subianto added a new program that is scheduled to start in January 2025: the daily free nutritious meal for school children (to combat stunting). This program is one that comes with a costly price tag.
Based on data from state news agency Antara, the free meal program targets a total of 82.9 million beneficiaries, with a budget of IDR 800 billion (USD $50 million), per day. While this program certainly has its advantages and brings the multiplier effect to the Indonesian economy (provided it is imposed effectively), it does also put quite some pressure on the government’s budget balance.
Indonesia’s Value-Added Tax System
VAT is a consumption tax levied on the value added at each stage of production and distribution. In Indonesia, VAT applies to most goods and services that are sold to the public in the formal sector, with the entrepreneur being responsible to collect it from the consumer. The owed VAT is calculated by crediting input VAT levied on the purchases from output VAT levied on the sales. Entrepreneurs typically have to issue tax invoices to collect VAT from consumers, except when they are retail goods sellers (such as supermarkets).
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