The VAT to Increase by 12%: What Will Happen Next Year?

Indonesia is preparing to increase its value-added tax (VAT) rate. The new rate will be one percentage point higher than the current 11% and will take effect in 2025. This change is part of a government plan to broaden the tax base and increase revenue.

Indonesia to Impose 12% VAT in 2025

The government has stated that the current value-added tax (VAT) rate of 11% will continue to be applicable for the current year. Nonetheless, according to Law Number 7 of 2021 on Tax Regulation Harmonization (UU HPP), a provision stipulates an increment in the VAT rate to 12%, starting to take effect no later than January 1, 2025.

However, the government can adjust the 12% VAT rate under specific conditions. According to Article 7, paragraph (3), the rate may vary between 5% and 15%, based on particular considerations.

The Previous VAT Increase from 10% to 11% in April 2022

Fajry Akbar, the Research Manager at the Center for Indonesia Taxation Analysis (CITA), views the policy decision to raise the VAT rate as one suitable method of boosting state revenues. 

Furthermore, Indonesia aims to increase its tax rate to catch up with neighboring countries like Thailand, which is already 16%.

Throughout 2022, Finance Minister Sri Mulyani Indrawati secured an additional IDR 60.76 trillion for the state coffers after raising the rate from 10% to 11%. 

In 2023, with the continuation of the 11% VAT policy, the government recorded tax revenues from VAT and luxury sales tax (PPnBM) components amounting to IDR 764.34 trillion, marking an 11.16% year-on-year growth.

The sector is primarily supported by VAT, mainly Domestic VAT (PPN DN) and Import VAT, which contribute 62.35% and 33.47%, respectively, to the total VAT/PPnBM revenues. 

Each contributes to state revenues of IDR 476.57 trillion and IDR 255.82 trillion, respectively. Currently, the government is preparing revenue projections for the 2025 State Budget, which is earmarked for the new administration.

READ MORE:

• Indonesia Imposes Stricter Penalties For Tax Non-Compliance
• Guide On Filing Corporate Annual Tax Return (SPT) In Indonesia
• Everything You Need To Know About Value-Added Tax (VAT) In Indonesia

List of Goods and Services Free from the 12% VAT Rate

Although the VAT rate increase can be an inconvenience, there are a few goods and services exempt from the 12% Value Added Tax:

Types	Descriptions
Essential goods highly needed by the general populace	Rice Unhusked rice Corn Sago Soybeans Salt (iodized or not) Meat (fresh or preserved) Unprocessed eggs Unadulterated cow’s milk Fresh fruits Fresh vegetables (including chopped ones)
Medical Healthcare Services	General practitioners specialists, and dentists Veterinarians Health professionals: dental experts, nutritionists, physiotherapists Midwifery and traditional birth attendants Paramedics and nurses Hospitals, maternity homes, health laboratories, and sanatoriums Psychologists and psychiatrists Alternative medicine practitioners Health services covered by national health insurance
Social Services	General practitioners specialists, and dentists Orphanages, elderly care facilities Firefighting services Emergency assistance during accidents Rehabilitation institutions Provision of funeral homes and burial services Non-profit sports-related services
Financial Services	Fund-raising services from the public, such as current accounts, time deposits, deposit certificates, savings, and/or similar forms thereof Depositing, lending, or borrowing funds to/from others using written instruments, telecommunication facilities, promissory notes, checks, or other means Financing services (including Sharia-compliant financing) Pawnbroking services (including Sharia and fiduciary) Guarantee services
Insurance Services	Excluding insurance agents, loss adjusters, and insurance consultants
Educational Services	Educational institution services, such as general education, vocational education, special education, civil service education, religious education, academic education, and professional education Extracurricular educational services
Labor Services	Labor supply services as long as the labor provider is not responsible for the work output of the laborers Training services for laborers

The Correlation of Indonesia’s VAT and Singapore’s GST

Singapore announced its plan to increase the Goods and Services Tax (GST) during the 2022 budget. The plan involves raising the GST from seven to eight percent in 2023, followed by another increase to nine percent in 2024. Indonesia has also applied a similar strategy for 2025. 

The increased revenue from the GST hike is being used to meet the country’s medium-term fiscal needs. This adjustment in taxation shows Singapore’s commitment to strengthening its tax revenue base, especially considering the rising healthcare costs in the city-state.

VAT Impact on Businesses

The introduction of VAT can have significant implications for businesses, including

Financial Impact

VAT adds costs for businesses by requiring them to collect and remit VAT to tax authorities, affecting cash flow management.

Pricing and Margins

VAT influences pricing and profit margins, requiring businesses to consider covering VAT costs while remaining competitive.

Compliance and Administrative Burden

VAT entails administrative tasks such as registration, record-keeping, issuing VAT-compliant invoices, and filing returns, posing challenges, especially for smaller businesses.

Impact on Sales and Customer Behavior

VAT introduction can alter consumer spending patterns based on price sensitivity, affecting product demand and sales volumes.

Competitive Landscape

Efficient VAT management can give businesses a competitive edge, while non-compliance or failure to adjust prices may lead to market challenges.

Supply Chain Considerations

VAT impacts supply chains, particularly in international trade, involving import/export VAT, customs procedures, documentation, and cash flow management.

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