12% VAT could take its toll on minimum wages, expert warns

Jakarta. The coming VAT hike could take a huge toll on Indonesia’s minimum wages, economist Achmad Nur Hidayat said in a recent interview.

A VAT rate of 12 percent will come into effect in January. However, the government’s decision to increase VAT by 1 percentage point has drawn criticism from experts.

“Although the policy aims to improve state revenues, it has a huge negative impact on the economy. The Indonesian middle class and minimum wage earners will be hit the hardest,” Achmad said.

For reference, the minimum wage in Indonesia’s most modern city, Jakarta, will be approximately Rp 5 million ($315.5) as of 2024. This represents an increase of 3.6 percent compared to the minimum wage of the previous year. The government will announce provincial minimum wage standards later this month.

The VAT increase could lead to an increase in the price of almost all goods and services, including daily necessities. Because many Indonesian workers do not see a significant increase in their income, they will have to hold back on spending as goods become more expensive.

Achmad said: “The Indonesian middle class has not seen significant income growth. In many cases, the minimum wage is only sufficient to meet the daily necessities of life.”

Similarly, economist Esther Sri Astuti said the VAT hike could lead to mass layoffs. A VAT increase could encourage companies to produce less while people’s purchasing power is weaker. They will have no choice but to let go of their employees to stay afloat.

“Companies will scale back production and perhaps even lay off their employees or take other (cost) efficiency measures,” says Esther.

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