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Jakarta, Ideatax -- The Coordinating Minister for the Economy, Airlangga Hartarto, stated that the government will increase the value-added tax rate from 11% to 12% in 2025 along with the increase in people's purchasing power and to sustain development programs (Between 2024).
It is known that in 2022 the government has increased the VAT rate from 10% to 11%. This incremental increase in VAT is regulated in Law Number 7 of 2021 concerning Harmonization of Tax Regulations or Harmonisasi Peraturan Perpajakan (HPP). Article 7 Paragraph (1) of the HPP Law stated that the VAT increase from 10% to 11% takes effect on April 1, 2022. Furthermore, Article 7 Paragraph (2) of the HPP Law also stipulates that the increase in VAT to 12% will take effect no later than January 1, 2025.
Although the Coordinating Minister for the Economy confirmed no plan to postpone the VAT rate increase to 12% in January 2025 (CNBC 2024), the HPP Law still provides room for changes in the VAT rate. Article 7 Paragraph (3) of the HPP Law states that the VAT rate can be changed to a minimum of 5% and a maximum of 15%.
Various parties have argued that the increase in the VAT rate will affect people's purchasing power. The Deputy Chairman of Indonesian Chamber of Commerce and Industry said that the increase in VAT rates will increase operational costs, which will increase the price of goods (Bisnis Indonesia 2024). Moreover, the Research Director of the Center of Reform on Economics said that the increase in VAT rates will significantly impact the middle class (Bisnis Indonesia 2024) because most of their income is for the goods and services consumption.
If the VAT increase regulation is applied in January 2025, Indonesia, along with the Philippines, will be the ASEAN country with the highest VAT rates. This fact is in contrast to Brunei, which does not charge VAT on the consumption of goods and services. Below are the details of the VAT rate comparison for each country:
Source: (ASEAN BRIEFING 2018)
As mentioned earlier, an increase in the VAT rate of 12% will potentially reduce people's purchasing power. Furthermore, the decrease in people's purchasing power is concerned with causing a multiplayer effect in the form of a decrease in economic growth rate due to decreasing aggregate demand.
However, the impact of tax revenue generated from the VAT rate increase cannot be underestimated. Some economists argue that an increase in the VAT rate will contribute 80 trillion rupiah to state revenue (Kontan 2024).
Therefore, to reduce the externalities arising from the VAT rate increase, there are several things the government can do. First, socialize the plan to increase the indirect tax rate. Adequate socialization and counseling are needed to ensure that all levels of society know the importance of the rate increase for the sustainability of development. Second, the government can use part of the proceeds from the VAT collection as a social security fund. Strengthening the social security fund is needed to protect the middle and lower classes of society against price increases caused by tariff increases. For example, the Japanese government uses all revenue from VAT for social security and pension plans. Therefore, if these two strategies are properly implemented, it is likely that the VAT increase will actually bring more benefits and can reduce the gap between the middle class and the lower class.
References
Antara. 2024. Menko Airlangga sebut tarif PPN naik 12 persen mulai 2025. March 8. Accessed March 14, 2024. https://www.antaranews.com/berita/4001700/menko-airlangga-sebut-tarif-ppn-naik-12-persen-mulai-2025.
ASEAN BRIEFING. 2018. Comparing Tax Rates Across ASEAN. July 26. Accessed March 16, 2024. https://www.aseanbriefing.com/news/comparing-tax-rates-across-asean/.
Bisnis Indonesia. 2024. Beban Berat Kelas Menengah Kala PPN Naik jadi 12%. March 13. Accessed March 16, 2024. https://ekonomi.bisnis.com/read/20240313/259/1748641/beban-berat-kelas-menengah-kala-ppn-naik-jadi-12.
—. 2024. Kadin soal Tarif PPN 12% di 2025: Daya Beli Masyarakat Bisa Turun. March 14. Accessed March 16, 2024. https://ekonomi.bisnis.com/read/20240314/12/1749401/kadin-soal-tarif-ppn-12-di-2025-daya-beli-masyarakat-bisa-turun.
CNBC. 2024. PPN Bakal Naik Jadi 12% pada 2025, Jadi Tertinggi se-ASEAN? March 14. Accessed March 14, 2024. https://www.cnbcindonesia.com/research/20240314122009-128-521915/ppn-bakal-naik-jadi-12-pada-2025-jadi-tertinggi-se-asean.
Kontan. 2024. Menakar Dampak Kenaikan Tarif PPN Jadi 12% Terhadap Penerimaan Negara . March 13. Accessed March 16, 2024. https://nasional.kontan.co.id/news/menakar-dampak-kenaikan-tarif-ppn-jadi-12-terhadap-penerimaan-negara.
