Indonesia presses ahead with VAT hike across the board, not just for luxury goods

JAKARTA – Indonesia on Dec 16 decided to go ahead with a wide-ranging increase in the value-added tax (VAT) to 12 per cent in 2025, reversing a plan to apply the hike only to luxury goods, but will introduce measures to soften the blow for lower-income earners.

By law, the VAT is scheduled to increase by 1 percentage point to 12 per cent from Jan 1, but there has been growing public pressure to delay it, prompting lawmakers to propose a selective VAT hike.

Finance Minister Sri Mulyani Indrawati said that as part of the increase, VAT will be charged for the first time on premium-quality food and services, including international schools and high-end hospitals.

“In line with the principles of justice, the 12 per cent VAT is also imposed on luxury goods and services consumed by people who can afford those,” Dr Sri Mulyani said in a press conference with other economic ministers.

Staple foods will remain exempt from VAT, while cooking oil sold under a government programme, sugar for industry and wheat flour will continue to be taxed at 11 per cent.

Senior Economic Minister Airlangga Hartarto said the government would offer up to 40 trillion rupiah (S$3.4 billion) in support measures to soften the impact of the VAT hike.

For middle-income households, the government would reduce electricity tariffs by 50 per cent for two months, Mr Airlangga said, while employees in labour-intensive industries earning up to 10 million rupiah a month would not pay income tax.

The VAT exemption on property purchases worth up to five billion rupiah was extended in full to the end of June 2025, and then there will be a 50 per cent exemption until the end of 2025.

The government also extended existing tax incentives for battery-based electric vehicles (EVs), and announced a new 3 percentage point cut in the luxury sales tax, which ranges from 6 per cent to 12 per cent.

Industry Minister Agus Gumiwang Kartasasmita said Citroen, China’s BYD and GAC Aion, which have committed to building EV plants in Indonesia, would be exempt from import duty and get luxury tax sales and VAT cuts for their vehicles.

President Prabowo Subianto has said he wants to boost tax revenue to 18 per cent of gross domestic product from around 10 per cent now, adding about US$100 billion (S$134.9 billion) in additional tax revenue. REUTERS