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Analysis: Govt waives new VAT for 15 key commodities to ease impacts
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Rising costs: A customer picks a bottled beverage from a refrigerated display at a supermarket in South Tangerang, Banten, on July 5. (Antara/Sulthony Hasanuddin)
T
o mitigate the potential impacts of the new value-added tax (VAT) rate of 12 percent beginning in January 2025, the government has decided to exempt 15 commodities from the new VAT rate or waive them entirely from VAT. This measure aims to protect consumers, particularly people from low-income households, so they do not bear the full burden of the tax hike on essential goods.
According to the government, increasing the VAT rate to 12 percent is mandated by Law No. 7/2021 on harmonization of tax regulations (UU HPP). Finance Minister Sri Mulyani has said the forthcoming VAT hike will be implemented selectively, primarily for luxury goods and services.
A VAT rate of 0 percent will apply to essential public goods and services, such as rice, meat, fish, eggs, vegetables, milk and sugar, as well as education services, health services, polio vaccines, public transportation, labor, financial services, insurance services and water utility.
The government plans to offer tax incentives totaling Rp 455.5 trillion (approximately US$29.39 billion), or 1.83 percent of gross domestic product (GDP), primarily through VAT and income tax exemptions.
The plan involves VAT exemptions worth Rp 256.5 trillion for goods. The largest exemptions are for food at Rp 77.1 trillion, followed by micro, small and medium enterprises (MSMEs) at Rp 61.2 trillion and transportation at Rp 34.4 trillion. Significant exemptions for public services include education and health at Rp 30.8 trillion, financial and insurance services at Rp 27.9 trillion, property at Rp 15.7 trillion, electricity and water utilities at Rp 14.1 trillion and other services at Rp 4.4 trillion.
The current 11 percent VAT rate will continue to apply to essential commodities such as flour, industrial sugar and government-trademarked cooking oil MinyaKita through the Government-Borne VAT (DTP) subsidy mechanism, under which the government will cover 1 percent VAT. This means consumer prices for the 15 public goods and services remains unchanged.
For MinyaKita, the government has estimated a Rp 900 billion DTP budget to cover a monthly supply of 175,000 tonnes for 2025. It has also estimated a Rp 900 billion DTP budget to cover a projected demand of 6.66 million tonnes of flour at Rp 13,139 per tonne. A smaller incentive of Rp 437.5 billion has been projected for industrial sugar.
