Value Added Tax 12% vs Social Aid

After weeks public debates on government plan to raise value added tax (VAT) from 11% to 12% since 1 January 2025, a high official offered interim solution. Chairman of National Economic Board (Dewan Ekonomi Nasional) Luhut B Panjaitan said, the plan probably will be delayed because government still prepare social aid to be distributed firstly. It’s interesting the social aid would be electricity subsidy or discout for the lowest electrical power customer group.

The plan to distribute electricity discount/subsidy is government’s good intention to relieve economic burden of people. However, the people have been suffering with inflation, and highly probably will get harder one at the end of this year, and so forth. Raising VAT will increase price of so many manufactured products that are sold at traditional and modern market, including in online market place. It means government’s aid will not decrease people’s spending significantly.

People of Indonesia will face strong headwinds in next year, mainly from President Trump’s policy on tariff. Even though the targets still will be China, Canada, and Mexico, but protectionist trade policy could influence China’s trade partner like Indonesia. It creates new inflation risk, then aggravate the people, mainly middle income group.

The better decision is reconsidering plan to raise VAT next year, then still focus on improve business climate and people’s purchasing power. Government should observe all processes to doing start business in Indonesia, neutralize red tape bureaucracy and politician, giving tax facilities, including carbon tax, and so on.

Moreover, government’s decision to raise state employee wages next year should be followed by private sector. The decision must be completed with improving employees’ productivity through education and training.

But, all suggestions will go in vain if the strategic decision maker in government of Indonesia still insist on their mind that the most important is healthy state budget, and have less attention to the economic at all. That’s irony because the biggest source of state income is corporate and personal income tax.