JAKARTA, Dec 1 — Indonesian businesses and unions have called for a legislated increase in the value-added tax (VAT) rate to be paused because the economic environment is deteriorating, as the government has signalled it is looking at ways to offer some targeted relief.
The VAT is due to rise by a percentage point to 12% on Jan. 1, under legislation passed in 2021. The government has said it is needed to improve the structural health of the budget, and a state bank has said it will have only a small impact on growth.
But opponents said the timing is not right with the economy in a post-pandemic pattern where growth seems stuck around 5%, with consumption weakening as the middle class shrinks, even before the risk of a new global trade war is considered.
“We must be wise and thoughtful. We cannot look at the short term, but look at the impact for the next 2 to 3 years,” Jemmy Kartiwa, chairman of the Indonesian textile association, told Reuters.
The Employers’ Association (Apindo) have taken their demand for a delay in the tax increase directly to President Prabowo Subianto, chairwoman Shinta Kamdani said.
Almost all products and services are subject to VAT, but staple foods and some items and services related to education and health are exempted.
An association representing small food stalls said past VAT hikes had led to increased operating costs and a decrease of around 10% in sales as customers cut back on spending.
Labour groups want the government to cancel the VAT hike and say they will protest if it goes ahead. Said Iqbal, president of Indonesian Trade Union Confederation (KSPI), said the hike would hurt workers and deepen social inequality.
“The declining purchasing power will worsen market conditions, threaten business continuity, and increase the possibility of layoffs in various sectors,” he said in a statement.
However, state lender Mandiri has forecast the VAT hike will only trim 0.05 percentage points off GDP growth next year and push the 2025 headline inflation rate up by 0.3 percentage points.
The bank is forecasting growth of 5.13% and inflation of 3.43% next year, including the VAT rise.
The increase was part of a tax overhaul bill passed by parliament in 2021, which included the VAT rising from 10% to 11% in 2022 and then to 12% in 2025.
Presidential economic adviser Luhut Pandjaitan said some assistance for poor people to pay electricity bills was being considered to cushion the impact of the hike, CNBC Indonesia reported.
And earlier this week, the government announced a temporary measure to cut domestic airfares by 10% to boost the tourism sector during year-end holidays. — Reuters
