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The urgency of fiscal consolidation and VAT reform
VAT exemption on essential goods and services such as staple goods will be maintained in favor of the poor and vulnerable households.
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Finance Minister Sri Mulyani Indrawati (middle), Tax Director General Suryo Utomo (left) and House of Representatives Commission XI chairman Dito Ganinduto (right) publicize the new Harmonized Tax Law (HPP) for business associations in Nusa Dua, Bali on Nov. 19, 2021. (Finance Ministry/Tax office's public relation)
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tarting April 1, the new Value Added Tax (VAT) provisions in the Harmonized Tax Law come into effect. The implementation of the new provisions in the midst of the current economic dynamics has certainly attracted a lot of controversy about whether it is necessary to implement this law at this time. Looking at the country’s fiscal management, the VAT reform could be a game changer due to many factors.
First and foremost, VAT reform is one way to respond to inequality issues and the other pressing challenges such as the impact of the COVID-19 pandemic and climate change. Our Gini ratio (measurement of inequality) as of September 2021 stood at 0.381, higher than neighboring countries such as the Philippines (0.423 in 2018) but still leaving room for improvement.
There is evidence that Indonesian fiscal policy has not optimally realized its redistributive role. Compared with other countries, based on the Commitment to Equity (CEQ) website, Indonesia’s fiscal policy, both in revenue and expenditure policies is one of the least effective in reducing income inequality in the CEQ countries surveyed.
The VAT system contributes to this. The World Bank and the Fiscal Policy Agency (BKF) in their 2018 study, for example, found that VAT exemptions had regressive incidence across welfare distribution. The study found that 48 percent of the VAT exemptions were benefiting the top-three decile households. This is not ideal because most exemptions are aimed at improving people’s welfare and protecting small businesses.
Under the new VAT provisions, mining products, medical services, social services, delivery and postal services, financial services, insurance services, and educational services are not exempted from VAT. This could be a good thing as there will be a broader base for VAT and greater fairness in taxation.
This is further assured by the fact that VAT exemption on essential goods and services such as staple foods will be maintained in favor of the poor and vulnerable households.
Based on Article 16B of the Harmonized Tax Law, basic necessities such as staple goods like rice, grain, corn, sago, soya bean, salt, meat, eggs, milk, fruit and vegetables are exempted from VAT collection.
