DIGIVESTASI - Economists have criticized the government’s policy to raise the Value-Added Tax (VAT) rate to 12 percent for luxury goods starting January 1, 2025. Analysts argue that this new rate will still affect the needs of the lower-middle-class population.

The exemption of food items from VAT is not a new policy, as it was already stipulated in Law No. 42 of 2009 and further reinforced through the Tax Harmonization Law (HPP) in 2021.

“The government’s claim appears to be more of a political effort to pacify public criticism. In reality, this rate hike still burdens the majority of lower-middle-class needs,” said Bhima Yudhistira, Executive Director of CELIOS, in a statement on Thursday (December 19, 2024).

Bhima added that implementing a 12 percent VAT rate would have broad implications for many consumer goods, including electronics, vehicle spare parts, and everyday essentials like detergent, bath soap, and clothing.

“Are detergent and bath soap considered luxury goods? The government’s narrative seems inconsistent with the principle of equitable taxation. Additionally, this VAT increase is unlikely to significantly boost state revenues because weak purchasing power will lead to lower business turnovers. Consequently, other tax revenues like corporate income tax, income tax Article 21, and customs duties might also be affected,” he explained.

Economists are also concerned about the impact of this policy on next year’s inflation rate, which could remain high, exacerbating economic pressures on the lower-middle-class population and accelerating their vulnerability. Bhima warned that the government’s introduction of multi-rate taxation without a clear legal basis could potentially violate VAT-related regulations.

From a different perspective, Wijayanto Samirin, an economist at Paramadina University, regarded the VAT hike to 12 percent as a suboptimal but understandable move. He sees the policy as an attempt by the government to maintain fiscal stability amid significant challenges in the coming years.

“This increase is aimed at securing fiscal conditions, particularly in preparation for the tough challenges of 2025 and 2026,” Wijayanto explained.

However, he cautioned that raising the VAT rate alone is insufficient to maximize state revenue. The government must also improve good corporate governance, broaden the tax base, address corruption cases in the tax sector, and enhance taxpayer compliance.

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