Jakarta. The Coordinating Ministry for Economic Affairs expects inflation to rise by 0.3 percent in 2025 following the implementation of a 12 percent Value-Added Tax (VAT) on Jan. 1.

Ferry Irawan, Deputy for State-Owned Enterprises Management at the ministry, said the impact on household consumption would be less pronounced than the previous VAT hike in 2022, as the new rate won’t apply to all goods and services.

“We estimate inflation will increase by 0.3 percent. Currently, inflation is below 2 percent, with November’s year-on-year figure at 1.55 percent, reflecting controlled inflation,” Irawan said Tuesday in Jakarta.

The VAT hike is regulated under the 2022 Tax Law, which raised the tax from 10 percent to 11 percent in April 2022 and mandates a further increase to 12 percent by January 2025.

According to the Central Statistics Agency (BPS), the 2022 VAT hike pushed inflation from 2.64 percent in March to 3.47 percent in April, eventually reaching 5.51 percent by year-end. 

For 2025, the government is targeting inflation at around 2.5 percent. Inflation control measures include building food reserves, price stabilization programs, and inter-regional cooperation frameworks, Irawan added.

Despite government assurances, the Center of Economic and Law Studies (Celios) warned the VAT hike could exacerbate inflation and pressure lower- and middle-income households, worsening economic vulnerability.

“The VAT increase will add Rp 101,880 ($6) to monthly expenditures for the poor and Rp 354,293 ($22) for the middle class,” said Celios Public Policy Director Media Wahyudi Askar.

Media argued that high VAT rates are more suitable for wealthier nations like Norway, Denmark, and Germany, where strong purchasing power and low inflation mitigate economic strain.

“In Indonesia, the middle class is already under pressure. The government should compare its VAT rate with other ASEAN countries, where Indonesia’s rate is the highest,” Media said.

To ease the economic burden from the VAT hike, the government has prepared a Rp 827 trillion ($51.65 billion) stimulus package targeting various sectors, including households, workers, small businesses, and labor-intensive industries. Households will receive food assistance and discounted electricity bills, while VAT exemptions will be applied to flour, industrial sugar, and subsidized cooking oil. Workers will be offered access to job loss protection schemes to mitigate the risks of layoffs. Small businesses are expected to benefit from the extension of the 0.5 percent final income tax rate, while labor-intensive industries will receive wage tax incentives, financing assistance, and subsidies for work accident insurance.

The government will also introduce VAT incentives for electric and hybrid vehicles to promote cleaner transportation options. In the housing sector, VAT exemptions will apply to homes priced between Rp 2-5 billion, although buyers will still need to pay VAT on the portion exceeding Rp 2 billion.