Jakarta. Indonesia is set to announce a new economic policy package on Monday, according to Chief Economic Affairs Airlangga Hartarto. The package will address various issues, including multi-tiered value-added tax (VAT) policies and non-tax economic measures.

"There are other aspects beyond taxation. This will come in a package, including incentives. Wait for Monday," Airlangga told reporters at his Jakarta office on Friday.

The policy package is expected to include fiscal incentives, such as tax relief for micro, small, and medium enterprises (MSMEs). The government is considering extending the 0.5 percent tax rate for MSMEs with annual revenue below a certain threshold. While Airlangga declined to provide further details, he hinted at incentives for small businesses. "There are incentives for MSMEs too. Just wait for Monday—buy your tickets for the announcement," he joked.

One of the key highlights of the package is the implementation of multi-tiered VAT rates. Luxury goods will be taxed at 12 percent, while certain goods will remain at the current 11 percent rate, and others will be exempt from VAT altogether. This tiered approach will form a significant part of the government’s broader fiscal reforms.

Finance Minister Sri Mulyani Indrawati recently confirmed that the government is finalizing the 12 percent VAT policy. The reform aims to ensure fairness while balancing the impact on consumer purchasing power, economic growth, and state budget health.

"We are detailing the formulation because this has consequences for the state budget. The principles of fairness, purchasing power, and economic growth must be balanced," Sri Mulyani said.

President Prabowo Subianto last week announced plans to raise Indonesia's value-added tax (VAT) from 11 percent to 12 percent starting in January. The tax increase, which was first outlined in the 2021 taxation law signed by his predecessor, Joko “Jokowi” Widodo, is part of the government's broader strategy to stimulate economic activity amid global challenges and encourage sustainable growth.

While the VAT increase is set to primarily target luxury goods, President Prabowo said the 12 percent rate will be selectively applied. He reaffirmed that this change is mandated by law, making it a necessary step for the government to take. However, the move has sparked concerns about potential misapplication, with economist Yusuf Rendy Manilet warning that without clear guidelines, some basic goods might mistakenly be taxed, undermining the government's aim to protect purchasing power.

The government has already exempted staple foods and healthcare services from the VAT and is considering further reductions for goods and services deemed essential. However, the plan to apply the higher VAT to luxury goods such as high-end vehicles and housing has raised concerns, especially after a previous VAT hike in 2022, which led to a 0.5 percent increase in inflation and a reduction in real income for many Indonesians.

Senior economist Esther Sri Astuti expressed doubts about the effectiveness of the new multi-tiered VAT system in maintaining purchasing power. She pointed out that while luxury goods would be taxed at 12 percent, the broader impact on the economy, particularly for low-income families, remains a significant concern. With many Indonesians slipping out of the middle class, the upcoming VAT increase could exacerbate financial strain for already struggling households.

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