(Jan 1): Indonesia scaled back its planned increase in the value-added tax (VAT) rate just hours before it was set to take effect on Jan 1 amid escalating public outcry. 

The VAT rate will be increased to 12% only for goods and services that are already subject to the existing luxury tax, such as private jets, yachts and pricier houses, President Prabowo Subianto said in a speech on Tuesday after unexpectedly attending the year-end meeting of the Finance Ministry.

All other goods and services will be subject to the current rate of 11%, Prabowo said. The VAT exemption or 0% VAT granted for basic necessities will remain in effect, he added.

Indonesia had announced just two weeks ago that the VAT increase, which is already set in law, would proceed as scheduled in 2025. To help mitigate its impact on inflation and purchasing power, the government had offered to ramp up social aid for poor households and tax incentives for labour-intensive sectors. Those measures will still push through, according to Prabowo.

The last-minute revision would complicate Indonesia’s VAT framework just hours before the hike was supposed to take effect in the new year. Finance Minister Sri Mulyani Indrawati told reporters that the government would stick with a single tariff scheme, despite differing VAT rates applying to various products. Prabowo said that the government is still working on the technical details, which will be issued under a new Finance Ministry regulation, soon. 

Criticism towards the tax hike continued to grow, with protests spreading across businesses, student and labour groups, opposition lawmakers, and among Indonesians on social media. They warned it would dampen an already weak consumption and manufacturing activity, and put the government’s 8% annual gross domestic product growth target out of reach. VAT made up more than 25% of total tax receipts last year. 

The government also plans to extend tax incentives for certain home and electric vehicle purchases through 2025, which could further shrink its revenue stream.

The selective implementation may only boost the tax receipts by about 3.2 trillion rupiah (US$198 million or RM888.96 million), compared with the initial 75 trillion rupiah target to be raised from a rate hike across the board, according to Mukhamad Misbakhun, who chairs the parliamentary commission overseeing financial affairs. “This is a difficult choice that President Prabowo’s government must make for the sake of supporting purchasing power,” he said.

Indonesia set a fiscal deficit target of 2.53% of gross domestic product for next year, reassuring investors that it will be kept below the 3% legal cap despite Prabowo’s ambitious spending plans. Next year, the country will roll out its US$30 billion free meal programme, renovate schools, build public housing and offer free medical check-ups, among other big-ticket projects.

Uploaded by Tham Yek Lee