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12% VAT: A Fiscal solution or an economic burden on the middle class?
The policy is considered ill-timed, given that the purchasing power of the people is already on the decline.
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A visitor takes a look at shoes on display in the Grand Indonesia shopping mall on Aug. 29. (Antara/Aprillio Akbar)
T
he increase in the Value-Added Tax (VAT) rate from 11 percent to 12 percent has been officially confirmed by Finance Minister Sri Mulyani to take effect on Jan. 1 next year. Although this decision has come as a surprise, it has been made to boost state revenue in support of post-pandemic recovery efforts.
This is not the first time the government has raised the VAT rate. In April 2022, the rate was increased from 10 percent to 11 percent. This gradual one-percentage hike has been presented as an effort to sustainably strengthen Indonesia’s tax system.
However, the 12 percent VAT increase has sparked widespread protests, as it is seen as potentially having a significant impact on consumer purchasing power, particularly among low- and middle-income groups. The policy is considered ill-timed, given that the purchasing power of the people is already on the decline. According to Statistics Indonesia, household consumption expenditure growth has remained below 5 percent for four consecutive quarters: 4.47 percent in the fourth quarter of last year, 4.91 percent in the first quarter of this year, 4.93 percent in the second quarter and 4.91 percent in the third quarter.
Although the government argues that this policy is necessary to improve the quality of public services and fund infrastructure projects, the tax hike adds further strain to households already grappling with rising living costs and stagnant incomes. Moreover, public distrust in the government’s efficiency in managing tax revenues remains relatively high. The public’s response to the tax hike decision should be carefully considered. Public support of the tax rise is strongly needed. However, the new policy has received widespread criticism from the public. Amid deflation, mass lay-offs and reduced job opportunities, the rise in VAT will only strain the public purchasing power.
It wounds the public even more knowing that Indonesia, along with the Philippines’ 12 percent VAT stands as the highest among other ASEAN countries. Whereas, as reported in Velocity Global 2024, Indonesia is among the top 10 countries in the world with the lowest minimum wages. Although we have seen a consistent increase in regional minimum wages, it is not proportional to the hikes in VAT rates. Jakarta, for example, only experienced a 3 percent increase in minimum wages, while the increase in VAT rate from 11 to 12 percent equals a 9 percent increase.
The controversy reflects public distrust of the governments' ability to provide improved and more inclusive public services. The citizens pay taxes in exchange for public services from the government. So, with the increase in VAT rates, it is essentially logical if the public demands more from the government. The ongoing debate has sparked the chicken-egg issue, on whether increasing tax revenue or building a more trustworthy government comes first.
The protest continues to highlight which population segments will be more negatively affected by the tax hikes. And again, it is the middle class who are burdened the most. Compared to the poor, people in the middle-income group have a higher tendency to purchase goods and services with VAT. With no social assistance, the increase in VAT rates only hurts the already burdened middle class by plummeting their purchasing power.
