Indonesia offers new incentives to boost spending before VAT hike

Indonesia has announced a fresh wave of fiscal incentives to spur consumer spending. These include extended tax breaks for electric vehicles, property, and automotive sectors, alongside a 50% electricity tariff cut for middle-income households.

Airlangga Hartarto, Indonesia’s coordinating minister for economic affairs, announced the fiscal measures during a press conference on December 16.

Finance Minister Sri Mulyani Indrawati, who was also present at the briefing, explained that these incentives are designed to help Southeast Asia’s largest economy remain resilient amid global economic turbulence.

Photo credit: farzand01 / Shutterstock

“We want to ensure that the economy continues to move forward, even as we acknowledge the numerous global challenges and domestic issues that require our constant vigilance,” she said.

Workers in labor-intensive industries earning less than 10 million rupiah (US$624) per month will receive full income-tax exemptions. This aims to offer crucial relief to the workforce following a regional minimum wage increase.

The government will extend tax incentives for EVs and introduce new ones for hybrid EVs, covering both completely built-up and completely knocked-down units. This move is expected to benefit carmakers such as Citroen and Chinese EV giant BYD, which have already committed to setting up manufacturing plants in Indonesia.

Meanwhile, the government has decided to extend the 11% value-added tax (VAT) exemption on home purchases that are valued at up to 2 billion rupiah (US$124,752) to the end of next year.

See also: Subsidies fuel Indonesia’s 2W EV growth, but at what cost?

David Sumual, an economist at Bank Central Asia, expects that the selective continuation of VAT exemptions could boost consumers’ purchasing power, particularly for durable goods.

Tax hike for luxury items

The move comes as the government presses ahead with its plan to increase VAT to 12% starting next year – a decision that has sparked public outcry but remains firmly on the agenda.

The proposed hike has faced criticism for being poorly timed amid weakened consumer spending and growing economic uncertainty.

The tax hike will target high-end goods and services, including premium-grade rice, select cuts of meat and fish, international schools, and globally accredited hospitals.

See also: Indonesia’s looming VAT hike causes uproar amid sluggish demand