Lately, Indonesian government has inaugurated a policy of increasing the Value Added Tax (VAT) rate by 12 percent as of 1 January, 2025. This has become a big polemic and the current hot topic in Indonesian society. Thousands of people experienced economic difficulties, the local market went out of business, and the high amount of unemployment sparked the anger of Indonesian citizens.
As reported by Republika, Indonesian news portal, Coordinating Minister for Economic Affairs— Airlangga Hartanto said the VAT rate will increase to 12% from the beginning of January, but some daily necessities such as rice, meat, eggs, are included in the VAT-exempt group. According to a press conference on Monday (16/12/2024), Airlangga emphasized that household consumption is the main support of the Indonesian economy as it contributes up to 50 percent.
Indonesia now has the highest VAT rate in Southeast Asia
With this new policy, Indonesia will align with Philippines as the country with the highest VAT rate in Southeast Asia (ASEAN). This VAT increase, according to Apregindo Chairman— Handaka Santosa, will be a major setback for the ongoing post-pandemic recovery efforts and will damage the already weakened purchasing power of the people. In an interview with the IDTV business channel, Handaka stated that Indonesia already holds the regional record for the highest VAT, even with the current VAT rate of 11 percent (Huanggrio, 2024). This policy is mandated by Law Number 7 of 2021 concerning Harmonization of Tax Regulations (HPP Law). Coordinating Minister for Economic Affairs Airlangga Hartarto emphasized that the increase in VAT rates will still pay attention to the principle of justice (Gabriela, 2024).
Indonesia’s economy has survived amidst global economic challenges. Indonesia has the largest economy in Southeast Asia and is a home to more than 270 million people, making it the fourth most populous country in the world. However, wages in Indonesia vary widely depending on many factors, such as region, industry, qualifications and experience. The estimated average salary at the national level is around IDR 5,000,000 to IDR 7,000,000, or approximately $350 to $490 per month (Reed, 2024). With Indonesia’s low minimum wage and high value-added tax, Indonesians are struggling financially and suffocating economically. The Center of Economic & Law Studies (CELIOS) estimates that the increase in VAT to 12% starting January 1, 2025 risks triggering high inflation next year (Kontan.co.id, 2024). Wahyudi Askar, an economist and Director of Public Policy at CELIOS, explained that an increase in inflation next year could increase economic pressure, especially on the lower middle class. He said that an increase in VAT to 12% would rise the expenditure of the poor by IDR 101,880 per month and this would worsen their economic condition. Meanwhile, the expenditure of the upper middle class could boost by IDR 354,293 per month. This will worsen the phenomenon of the middle class dropping into the vulnerable middle class, according to Wahyudi.
The gain in VAT is not equivalent to the increase in the provincial minimum wage, which is not comparable to the weakening of purchasing power rather than a partial and temporary economic stimulus (Bhima, 2024).
With a high amount of unemployment, the Indonesian government is strangling the middle and lower classes
High taxes conditions along with Indonesia’s high unemployment rate, are like plummeting down the steps. Although according to the Central Statistics Agency (BPS), the number of unemployed people has decreased by 0,79 million since 2023, followed by Indonesia’s open unemployment rate (TPT) which also slid to 4,82% in February 2024, down about 0.63% from 5,45% in February 2023, data from the International Monetary Fund (IMF) shows that Indonesia’s unemployment level tops among six other countries in Southeast Asia. Reporting from Tempo, the unemployment rate in Indonesia according to the IMF reached 5,2 percent in April 2024. Followed by the Philippines at 5,1 percent, Brunei Darussalam at 4,9 percent, Malaysia at 3,52 percent, Vietnam at 2,1 percent, Singapore at 1,9 percent, and Thailand at 1,1 percent.
In addition, the latest data from the Ministry of Manpower shows that 46,240 workers were laid off from January to August 2024, indicating the threat of layoffs in various industries. Meanwhile, former Indonesian president— Joko Widodo said that job opportunities will be increasingly limited in the future due to the number of workers continues to increase.
Airlangga Hartato admitted that the number of middle class people in Indonesia has decreased. Currently, 17,13% of Indonesia’s population belongs to the middle class, which means that around 50% of the population is at the level of the Expiring Middle Class or threatened to drop down to the poor category. Based on the Senior Economist— Anny Ratnawati, the World Bank has anticipated the threat to the middle class, with the middle class declining from 23% to 17% and the lower middle class rising from 47% in 2018 to 49% in 2023. With formal employment diminishing, reflected in the failure of the labor-intensive manufacturing sector, the middle class faces the same threat. Coupled with the government’s new policy of increasing the amount of value-added tax, it is the uncertainty of income sources that makes life difficult for the middle class (CNBC, 2024).
              With a high rate of unemployment in Indonesia, thousands of middle-class people facing downgrading, and thousands of other layers of society living below the poverty line, how can the Indonesian government justify raising the value added tax policy?
References
Gabriela, M. (2024). List of Goods and Services Affected by the 12 Percent VAT Increase as of January 1, 2025. Tempo.co.
Huanggrio, V. (2024). Business Association Says Indonesia Already Has Highest VAT Rate in Region. Jakarta Globe.
Puspita, M. (2024). Hingga Februari 2024, Jumlah Pengangguran di Indonesia Tembus 7,2 Juta Orang. Tempo.co.
Reed, A. (2024). What is the Average Salary in Indonesia? Livetecs.
Risalah, D. (2024). Sah! PPN Tetap Naik 12 Persen pada 2025, Sembako Bebas Pajak. Republika.
Wikanto, A. (2024). Berlaku 2025, Ini Daftar Barang Kena PPN 12%, Cek Dampaknya Terhadap Perekonomian. Kontan.co.id.
