Danny Setiawan – Tax, Finance & RM
Starting January 1, 2025, Indonesia’s Value Added Tax (VAT) will rise from 11% to 12%, as mandated by Law Number 7 of 2021, Chapter IV Article 7 on the Harmonization of Tax Regulations. This policy aims to boost government tax revenues to a target of IDR 3,000 trillion in 2025. But what does this mean for businesses, the middle class, and the broader economy? Let’s explore.
The Bigger Picture: Why Raise VAT Now?
Indonesia’s economy has been facing challenges in recent months. A combination of deflation and weaker consumer spending—partly influenced by the uncertainty surrounding the 2024 election—has left businesses cautious, adopting a “wait-and-see” approach.
As a result, state tax revenue targets for 2024 fell short. To bridge the budget deficit, the government has had to borrow more and cut spending in certain areas. Raising VAT is seen as a step to stabilize public finances, but is it the right move at this time?
Middle-Class Spending: A Declining Trend
According to BPS (Statistics Indonesia), the middle class contributed 38.28% to total public consumption in 2024, down from 43.39% in 2019. This steady decline in spending reflects the middle class’s eroding purchasing power—an issue that could stifle economic growth.
Adding to the strain, middle-class priorities have shifted. Spending on leisure, vehicles, durable goods, and health has decreased, while spending on essentials like housing, food, education, and taxes has increased. Notably, the share of middle-class expenditures on taxes and contributions rose from 3.48% in 2019 to 4.53% in 2024—a clear sign of growing financial burdens.
With VAT climbing to 12%, these pressures are likely to intensify.
The Ripple Effects of Higher VAT
What should we expect in 2025 with this tax hike? Here are some likely impacts:
1. Weaker Purchasing Power: As goods and services become more expensive, households may tighten their belts further, slowing consumption-driven growth.
2. Tougher Competition for MSMEs: Micro, small, and medium enterprises (MSMEs) could struggle to compete as higher costs eat into profit margins.
3. Reduced Gross Profit: Businesses, particularly MSMEs, may find it harder to sustain profitability, forcing them to look for cost- cutting measures.
4. Employment Pressures: With a 6.5% increase in the provincial minimum wage (UMP) also taking effect in 2025, employers may need to make tough decisions, including workforce reductions or scaling back operations.
What Can Businesses Do to Adapt?
If you’re an entrepreneur, here are some strategies to consider:
- Focus on Efficiency: Streamline processes to minimize costs without sacrificing
- Leverage Technology: Invest in tools that improve productivity and reduce
- Diversify Revenue Streams: Explore new markets or products to spread
- Strengthen Customer Relationships: Build loyalty through personalized experiences and value- driven offerings.
What’s Your Take?
The VAT hike is undeniably a bold move by the government. While it may strengthen state finances in the long term, it also poses significant short-term challenges for businesses and households.
How do you plan to navigate these changes? Will this policy impact your spending, investments, or business strategy?