In 2024, the Indonesian government's announcement of plans to adjust the VAT rate garnered widespread attention. Specifically, since 2021, based on the 2021 Tax Regulation Harmonization Law No. 7 (hereinafter referred to as "Law No. 7/2021"), the plan to increase the VAT from 11% to 12% had been on the agenda. According to this regulation, the VAT for 2025 was set to be adjusted to 12%, applicable not only to luxury goods but also to non-luxury goods that were previously subject to an 11% VAT.

However, at the end of 2024, the Indonesian government announced that, considering the consumption capacity of the Indonesian public and the overall stability of the economy, the 12% VAT would only apply to luxury goods, while non-luxury goods would continue to maintain the 11% VAT rate. Therefore, this article will provide a brief analysis of this special adjustment to the VAT rate at the beginning of the year.

1. Specific Adjustments
   According to Law No. 7/2021, starting from 1 April 2022, the VAT rate in Indonesia was increased from 10% to 11%, and it was set to be raised to 12% from 1 January 2025. Along with the increase of VAT to 12%, several incentive measures were also to take effect, including the distribution of rice to impoverished families and providing a 50% electricity discount to some middle-income families, among other measures.

   However, just a few hours before the decision to increase VAT to 12% was to take effect, the Indonesian government stated that the VAT increase to 12% would only apply to luxury goods and related services. Specifically, luxury goods include private jets, cruise ships, yachts, luxury cars, and properties valued at IDR 30 billion (about 1.85 million US dollars) or more. For non-luxury goods, the 12% VAT is calculated based on 11/12 of the sales price, alternative cost, or import price, that is, 12% × 11/12 × sales price, alternative cost, or import value. In short, Indonesian consumers still only need to pay an 11% VAT for non-luxury goods.

2. Reasons for the Adjustment

• Public Opinion Pressure

On the eve of New Year's Day 2025, large-scale public gatherings erupted across Indonesia, with thousands of people gathering in multiple cities, strongly demanding that the government abandon the plan to increase the VAT in order to alleviate concerns about the decline in consumer purchasing power. Officials from relevant departments of the Indonesian government also stated that the original intention of increasing the VAT was to ensure that the public would not bear additional burdens. If the VAT increase led to a decline in public consumption capacity or even affected the standard of living, then maintaining the status quo might be a more appropriate choice.

According to relevant statistics, if the VAT were to be increased from 11% to 12%, the prices of daily necessities and other consumer goods might soar, imposing a heavy burden on the public, especially on vulnerable groups. In addition, the monthly expenditure of Indonesia's middle class is also expected to increase, leading to more people slipping from the middle class.

• Strong Opposition from the Business Community

  On the eve of New Year's Day 2025, large-scale public gatherings erupted across Indonesia, with thousands of people gathering in multiple cities, strongly demanding that the government abandon the plan to increase the VAT in order to alleviate concerns about the decline in consumer purchasing power. Officials from relevant departments of the Indonesian government also stated that the original intention of increasing the VAT was to ensure that the public would not bear additional burdens. If the VAT increase led to a decline in public consumption capacity, or even affected the standard of living, then maintaining the status quo might be a more appropriate choice.

  According to relevant statistics, if the VAT were to be increased from 11% to 12%, the prices of daily necessities and other consumer goods might soar, imposing a heavy burden on the public, especially on vulnerable groups. In addition, the monthly expenditure of Indonesia's middle class is also expected to increase, leading to more people slipping from the middle class.

3. Future Impacts
   As mentioned above, according to Law No. 7/2021, the implementation of the 12% VAT coincided with the measure of providing a 50% electricity discount to some middle-income families. From a fiscal perspective, increasing the VAT rate is a way to "increase revenue," while the electricity discount is a way to "reduce expenditure" for the public. The Indonesian government currently tends to use national fiscal resources more efficiently and precisely, with the aim of alleviating the burden on the public rather than simply increasing fiscal revenue through raising the VAT. The chairman of the Indonesian National Economic Committee also clearly stated that the VAT increase measures could only be advanced after the relevant assistance measures were implemented.
   
   Given that the VAT increase is limited to the luxury goods and service sectors, the government is expected to only gain an additional income of about 32 trillion Indonesian Rupiah in the future. In contrast, if the 12% VAT were to be fully implemented, the government is expected to increase revenue by 750 trillion Indonesian Rupiah. This significant difference will undoubtedly have a certain impact on the government's fiscal revenue, thereby putting pressure on fiscal planning and budget arrangements, especially in the fields of infrastructure construction and public services that require a large amount of funding.
   
   However, the relatively reduced fiscal revenue also prompts the government to use limited funds more efficiently. Through a series of incentive measures, such as distributing basic living materials to impoverished families and providing a 50% electricity discount for two months to middle-income families, it not only effectively reduces the living costs of low-income groups and maintains social stability but also helps to ensure the stable operation of the national finances, providing strong support for the continuous growth of the Indonesian economy.