Indonesia's finance minister defends plan to raise VAT in January

JAKARTA - Indonesia’s Finance Minister Sri Mulyani Indrawati defended plans to raise value added tax (VAT) in January amid criticism it will hurt consumers, arguing the move needed to be explained well to win the backing of Indonesians.

The VAT rate is scheduled to rise to 12 per cent in two months time from 11 per cent, based on laws passed in 2021. Some lawmakers, business groups and economists say the increase should be delayed because it could reduce people’s purchasing power.

“We need to prepare for this policy to be applied with good explanation. Not blindly, but we must maintain the health of the state budget,” Sri Mulyani said in a parliamentary hearing late on Nov 13.

“However, at other times, the state budget must be able to respond in a way like we had seen in past episodes, like the global financial crisis and the pandemic,” she added.

In September, Indonesia set a tax revenue target of 2,490.9 trillion rupiah (S$210.86 billion) for fiscal year 2025, up 12.3 per cent from expected tax revenues in the current fiscal year.

President Prabowo Subianto, who took office last month, promised in campaign rallies ahead of the February election to increase tax revenues using technology and by improving collection, not necessarily by raising rates.

Reflecting concerns the VAT increase could hurt the economy, ruling coalition lawmaker Muhammad Kholid called on the government to reconsider the change.

“Raising the tax rate in an economy that is not good should not be the first choice, not the second, it should be the last,” he said.

Indonesia’s economic growth has held steady around 5 per cent since the Covid-19 pandemic, including in the third quarter, when gross domestic product expanded 4.95 per cent from a year earlier. REUTERS