Jakarta. The planned increase in Indonesia’s value-added tax (VAT) rate from 11 percent to 12 percent could reduce the country's gross domestic product (GDP) by Rp 21 trillion ($1.3 billion), an economist warned on Thursday.

“Our national GDP stands at approximately Rp 12,300 trillion. The VAT hike could potentially reduce GDP by 0.17 percent, equivalent to around Rp 21 trillion,” said Rizal Taufikurahman, an analyst at the Institute for Development of Economics and Finance (Indef).

He noted that the VAT increase would weaken purchasing power, dampen public consumption, and slow job creation. In addition, it could undermine Indonesia’s competitiveness and exports, he said.

“The VAT hike poses new risks to the national economy, particularly in key sectors that significantly contribute to economic growth. This reduction in GDP is an undesirable consequence,” Rizal explained.

Jahen Rezki, an economist from the University of Indonesia, echoed these concerns, highlighting that the VAT hike could exacerbate the ongoing slowdown in economic growth. Indonesia’s economic expansion has already decelerated, with growth falling to 4.95 percent in the third quarter of 2024 from 5.05 percent in the previous quarter.

The government plans to implement the VAT increase starting January 1, 2025. This timing could potentially offset the anticipated boost in public consumption during Ramadan, which falls in March.

“The seasonal effect of Ramadan could drive quarterly economic growth above 5 percent in the first quarter [of 2025]. However, it remains to be seen how the VAT hike will impact growth -- whether consumers will respond by curbing their spending,” Jahen said.