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Imposing VAT on self-build projects hinders public housing development
If we accept housing as a basic need, then VAT on self-built homes contradicts the principle of fairness.
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Visitors look at a scale model of a housing complex on April 24, 2024, at an exhibition in Tangerang, Banten. (Antara/Muhammad Iqbal)
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n their joint article in The Jakarta Post on Oct 10, 2024, titled “Closing the gap in VAT on self-build projects to ensure fairness”, Ilhamy and Hekmatyrta discuss how the new value-added tax (VAT) on self-build projects aims to promote fairness by taxing independent builders. But is that the necessary evil we just have to deal with?
The article notes that imposing VAT on self-build projects ensures that contractor-built and self-built homes are taxed similarly, but it overlooks the fundamental variations between low-income households and larger families building homes for necessity and luxury or investment. It promotes fairness by homogeneity, not economic motive or ability.
Adding VAT to high-value renovations, regardless of size, makes sense in theory, but it doesn't address how necessity-driven renovations, like when a family grows, compares to luxury-driven aesthetic changes. Both could cause tax disparities. Renovations can be costly, but they don't indicate a family is rich. Sometimes it's where they reside, prices of materials or local rules like safety codes that raise renovation costs.
Value thresholds for self-build projects or VAT adjustments depending on local economic realities may make things fairer, but they may also complicate tax enforcement and administration. Since labor and material prices vary, the government may have trouble determining a project's true economic value in different places. Dodging obligations, engaging in shady methods or misrepresenting the project's value to avoid taxes are possible.
Bigger homes or more expensive improvements may not necessarily indicate affluence or luxury. Larger homes, especially in cities, may be passed down or built by poor people and require costly upgrades to meet regulations. Thus, both the hike and VAT for self-build projects could impact middle-income people. Their renovation costs generally stem from geography or circumstance, not affluence. When expenses rise, consumers may reconsider building or renovating homes. This could reduce construction jobs and housing market material and service demand. This may affect associated economic growth unexpectedly.
Housing is a basic human need. Article 16B paragraph 1(a) letter j of the VAT Law allows exemptions for essential goods and services deemed critical for national development. While the provision primarily lists necessities like food and drink, housing undeniably fits the criteria of essential goods. According to the Law on the Formation of Legislation, explanations are just there to officially clarify the norms. They don’t change or expand what those norms mean. If the VAT Law lets essential goods be exempt, and since housing is a basic need, there are legal grounds not to collect VAT from self-build projects.
If we accept housing as a basic need, then VAT on self-built homes contradicts the principle of fairness. By taxing these projects, we place additional financial strain on families already grappling with rising costs of living. Eliminating VAT for self-built housing could reduce these burdens and align with the government’s goals of reducing the housing backlog, which leaves millions of Indonesian families without adequate shelter.
