Economists have warned that Indonesia’s planned increase in value-added tax (VAT) from 11% to 12% could lead to a reduction of 21 trillion IDR (1.3 billion USD) in the country’s GDP. The tax hike is expected to have broad economic consequences, particularly by affecting consumer behavior and overall economic activity. Experts fear that this move could slow down growth in the country’s economy.
Rizal Taufikurahman, an analyst at the Institute for Development of Economics and Finance (Indef), explained that the VAT increase would weaken purchasing power, thereby reducing public consumption. This, in turn, could slow job creation and affect Indonesia’s international competitiveness. Additionally, the tax hike might also reduce export potential, further challenging the country’s economic performance.
Jahen Rezki, an economist from the University of Indonesia, supported these views, noting that the VAT increase could worsen the already slowing economic growth. The economy has shown signs of deceleration, with the GDP growth rate dropping to 4.95% in the third quarter of 2024, down from 5.05% in the previous quarter. This decline in growth is causing concern among economists, as it suggests that the country could face more challenges in the near future.
The Indonesian government plans to enforce the VAT increase starting January 1, 2025, with the adjustment mainly affecting luxury goods. However, this proposal has faced significant public opposition. Many fear that the tax hike will place a heavier burden on certain consumers, leading to reduced demand and potentially stifling economic recovery.
Despite the concerns raised by economists, the government remains firm on implementing the VAT increase. The authorities argue that the hike is necessary to increase revenue and strengthen Indonesia’s fiscal position. However, the decision continues to spark debate, as the potential economic risks are weighed against the need for long-term financial stability.
