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.

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:

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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With InCorp Indonesia’s specialized services, you can take the burden off tax reporting. Our consultants understand the complexities of Indonesian tax regulations. 

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Don’t let tax reporting slow you down. Contact InCorp Indonesia today to discuss how our services can benefit your business.