Most people think that this policy will hurt their perception of tax fairness, as applying VAT on basic necessities will weaken their purchasing power while discouraging production and consumption.

This argument is very reasonable, as shown in the bill on the general provisions on taxation (RUU KUP), which plans to expand the list of taxable items under VAT to include inelastic goods and services. These are the goods and services that people will always consume, regardless of price.

In addition to basic necessities and educational services, the bill also plans to tax health services, social services, financial services, insurance services and public transportation services. Since VAT is a consumption tax, the additional burden imposed on these basic goods and services could have the simultaneous effect of raising the prices of other goods, which could lead to inflation, declining aggregate purchasing power and consumption to damage economic growth in the long run.

However, the government is conveying a bigger plan through the bill. The government has explicitly stated that the enforcement/enactment of VAT on the importation and/or delivery of certain taxable goods and the delivery of certain taxable services that were previously not subject to VAT was intended to reduce the regressive nature of VAT.

By imposing a multiple rate system to replace the single rate scheme for VAT, the government is trying to restore a perception of tax fairness among the public. According to the government, the idea is to impose a lower VAT rate for the delivery of certain taxable goods and services that the majority of people need, and impose a higher VAT rate on certain goods and services that are specifically consumed by people of the high-income group.

At first glance, the idea seems reasonable enough. When viewed as a whole, however, it has many shortcomings. First, increasing the VAT rate from 10 percent to 12 percent will definitely increase the burden on general consumption. Even a potential mix combining the lowest VAT rate of 5 percent and the highest VAT rate of 15 percent still leaves the question as to how this multiple VAT rate will be applied in reality.

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