Indonesia is likely to delay the start of the VAT hike due to growing concerns over the cost of living

The head of the National Economic Council, Luhut Pandjaitan, said on November 27 that there is likely to be a delay in the implementation of the VAT.

“Yes, it is almost certain that it will be postponed,” Mr Luhut told reporters, as quoted by local media. “Before the 12 percent VAT is introduced, we must first give a boost to those who are struggling economically.”

The government collected 694.8 trillion rupiah in VAT in 2022, which was increased by 1 percentage point to 11 percent on April 1, 2022.

VAT collection for 2023 was 749.9 trillion rupiah, or 40 percent of the government’s tax revenue for that year, totaling 1.87 trillion rupiah.

The VAT increase from 1 percentage point to 12 percent, if implemented from January 1, is expected to generate an additional 75 trillion rupiah for the national coffers by 2025.

The additional VAT revenue will be a boon to the Prabowo government, which has launched a slew of ambitious programs such as free meals for children and pregnant women, free health screenings and the development of large food plantations in South Papua province to grow crops , including paddy. and cassava to build food self-sufficiency.

On the other hand, the increase is expected to reduce household consumption by 40.7 trillion rupiah in 2025, with as many as 550,000 workers potentially laid off if the higher tax is implemented from January 1, according to Jakarta-based think tank Center of Economic and law studies (Celios).

Companies may be forced to lay off employees to combat declining sales and reduce their higher operating costs, the Celios report dated November 28 said.

Faced with a higher consumption tax, “the middle class may refrain from purchasing goods, or may buy goods on credit. They can also buy goods of lower quality or smaller quantity,” director Bhima Yudhistira told ST.

The middle class segment plays an outsized role in Indonesia’s economic growth because, unlike most export-dependent countries, Southeast Asia’s largest economy relies heavily on domestic consumption.

The 47.9 million people grouped as “the middle class” – in the world’s fourth most populous country with about 278 million people – each spend between 2.04 million rupiah and 9.9 million rupiah per month.

Mr Bhima said consumers can also shift their purchases from tax-paying retailers to unregistered and untaxed stores. This will expand the “shadow economy” and go against government efforts to increase revenues.

Dr. Mohammad Faisal, executive director of Jakarta-based think tank Center of Reform on Economics Indonesia, told ST that the VAT increase is ill-timed as the purchasing power of the middle class is shrinking.

“All indicators of middle class purchasing power, such as salary levels, purchasing levels and consumer confidence, are declining. The government should really wait for their purchasing power to recover,” he said.