Jakarta. The upcoming value-added tax (VAT) hike could take a huge toll on Indonesia’s minimum wage earners, economist Achmad Nur Hidayat said in a recent interview.

A 12 percent VAT is set to come into force in January. However, the government's decision to increase the VAT by 1 percentage point has fueled criticisms from experts.

“While the policy aims to improve the state revenue, it creates a huge negative impact on the economy. The Indonesian middle class and minimum wage earners will be the most affected,” Achmad said. 

For reference, the minimum wage in Indonesia’s most modern city Jakarta stands at around Rp 5 million ($315.5) as of 2024. This marks a 3.6 percent increase from the previous year’s minimum wage. The government is set to announce the provincial minimum wage standards later this month.

The VAT hike could cause the price of almost all goods and services to go up, including daily necessities. As many Indonesian workers do not see a significant increase in how much they earn, they are set to hold back on their spending when goods become more expensive.

Achmad said: “The Indonesian middle class has not seen significant growth in their income. In many cases, the minimum wage is only enough to pay for daily necessities.”

Likewise, economist Esther Sri Astuti said that the VAT hike could lead to massive layoffs. A VAT hike could prompt companies to produce less amidst weaker people's purchasing power. They will have no choice but to let go of their employees to stay afloat.

“Companies will cut back production and might even lay off their workers or conduct other [cost] efficiency measures,” Esther said.