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Govt walks back sweeping VAT hike on last day of the year

President Prabowo Subianto and Finance Minister Sri Mulyani Indrawati jointly announce that the VAT hike from 11 percent to 12 percent would only apply to luxury goods and services.

Vincent Fabian Thomas (The Jakarta Post)
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Wed, January 1, 2025

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Govt walks back sweeping VAT hike on last day of the year Policy u-turn: President Prabowo Subianto (second left) and Finance Minister Sri Mulyani Indrawati (second right) brief reporters on the value added tax (VAT) decision at the Finance Ministry's office in Jakarta on Dec. 31, 2024. (BPMI Setpres/Muchlis Jr)
Versi Bahasa Indonesia

I

n an unexpected turn of events, the government has decided to walk back its sweeping plan to hike the value-added tax (VAT) mere hours before the controversial policy was to take effect at the turn of the year on Jan. 1, 2025.

Instead, President Prabowo Subianto and Finance Minister Sri Mulyani Indrawati on Tuesday announced that the VAT hike from 11 percent to 12 percent would only apply to luxury goods and services.

Such luxury items include private jets, cruise ships, yachts and properties priced at Rp 30 billion (US$1.85 million) or higher. The purchase of luxury cars and motorcycles will also be impacted.

"Today, the government has decided that the VAT rate hike from 11 percent to 12 percent will only be applied to luxury goods and services that are already subject to luxury sales tax and are consumed by high income earners,” Prabowo told reporters in a briefing at the ministry’s office.

“All other goods and services already applied with the 11 percent VAT will see no change in VAT rate,” Sri Mulyani said in the same briefing.

The decision partially reversed a government announcement on Dec. 16 that jolted consumer prices and triggered wide panic amid a growing cost of living crisis. Officials at the time said the government would proceed with a plan to raise the VAT to 12 percent across the board starting Jan. 1 2025, noting exceptions for industrial sugar, wheat flour and affordable cooking oil sold in government programs.

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The hike was stipulated in Law No. 7/2021 on Tax Harmonization, which mandated increasing the VAT rate from 10 to 11 percent on April 1, 2022, followed by a subsequent increase to 12 percent on Jan. 1, 2025.

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