Indonesia’s looming VAT hike causes uproar amid sluggish demand

Indonesia’s plan to increase its value-added tax (VAT) to 12% starting January 1, 2025, has triggered a wave of backlash from consumers and businesses. The move, which will place the country alongside the Philippines as having the highest VAT rate among the ASEAN nations, intensified fears of weakened spending and economic instability.

As the clock ticks down, the imminent tax hike in Southeast Asia’s largest economy is deepening the uncertainty surrounding Indonesia’s economic outlook. It poses a major challenge to the ambitious economic agenda of the new president, Prabowo Subianto.

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Several business groups have heightened their lobbying efforts, urging the government and parliament to postpone the hike. They caution that the policy could erode consumer purchasing power already strained by rising costs.

Despite this, Finance Minister Sri Mulyani Indrawati confirmed last week that the long-debated VAT increase, which was first proposed in 2021, will take effect as planned. During her address to parliament, the minister highlighted that key sectors such as electricity, electronics, construction, and apparel will bear the brunt of the hike.

Retailers and small businesses are among the plan’s most vocal critics.

Solihin, chairman of the Indonesian Retailer Association, warns that the planned hike could severely affect the retail sector, which is still struggling to navigate shifting consumer behavior in the wake of the Covid-19 pandemic.

“This hike is a tough pill to swallow. Ultimately, it’s the consumers who will feel the burden. We hope the government will reconsider and delay the increase,” Solihin tells The Business Times.

Small-business owners like cafe operator Ester Natalia fear the ripple effects of higher production costs driven by rising prices for raw materials, maintenance, electricity, and wages.

“My biggest fear is that when all costs rise simultaneously while sales remain stagnant, I’ll run out of steam trying to cover the cash flow gaps,” she says. “Worst-case scenario, I might even have to shut down the business – something I dread to imagine.”

To cope, Natalia plans to carefully communicate price increases to customers. She aims to frame these changes as necessary for maintaining the quality and service they value.

With mounting resistance and widespread concerns over the hike’s economic fallout, the government faces an uphill battle in balancing fiscal policy with economic stability.

Race to raise confidence

Indonesia is racing against time to battle weak domestic demand and consumer confidence amid efforts to achieve its annual economic growth target of 8% in the coming years.

Bank Indonesia’s latest survey revealed that consumer confidence dropped to 121.1 in October from 123.5 in September of this year. This was driven by growing concerns over economic uncertainty, job availability, and salary expectations.

First controversial move