Jakarta. Indonesia’s plan to raise its value-added tax (VAT) to 12 percent in early 2025 is expected to disproportionately affect the middle class, according to Mohammad Faisal, Executive Director of the Center of Reform on Economics (CORE) Indonesia.

Faisal said that while the government aims to increase state revenue through the VAT increase, the middle class is already struggling with stagnating consumption levels.

“The middle class has not received any support during the COVID-19 pandemic. Even after the pandemic has subsided, their consumption and business activities have not fully recovered,” Faisal told Beritasatu.com on Saturday.

The VAT is set to rise from 11 percent to 12 percent on January 1, 2025.

Faisal warned that additional levies, including excise duties and insurance taxes, would further erode the financial stability of the middle class.

“Next year, when these measures are implemented—including excise duties and other taxes—the middle class will bear the brunt,” he said.

According to the Central Statistics Agency (BPS), Indonesia’s middle-class population shrank from 57.33 million in 2019 to 47.85 million in 2024. Meanwhile, the “aspiring middle class,” those at risk of falling into poverty, surged to 137.5 million.

In Jakarta, the 2024 minimum wage stands at approximately Rp 5 million ($315.50), reflecting a 3.6 percent increase from the previous year. The year-on-year inflation rate was recorded at 2.21 percent as of October 2024, according to BPS.

Faisal warned that the VAT hike would likely weaken middle-class purchasing power, leading to reduced consumption of goods and services. This, in turn, could negatively impact production, industries, and the manufacturing sector.

“It’s not just about economic growth. It could also lead to widening inequality and slower business activity. The government needs to account for these factors,” Faisal said.

Dwi Astuti, Director of Public Relations at the Directorate General of Taxes, assured the public that the government has introduced several measures to mitigate the impact of the upcoming VAT increase.

Among these measures is the Harmonization of Tax Regulations Law (UU HPP), which raises the taxable income threshold for individuals. Under the new law, individuals earning up to Rp 60 million annually will be taxed at a rate of 5 percent, up from the previous threshold of Rp 50 million. Additionally, micro, small, and medium enterprises (MSMEs) with annual turnovers of up to Rp 500 million are exempt from income tax.

To further alleviate the burden, essential goods and services critical to daily life will remain VAT-free. Exemptions include staple foods such as rice, corn, and salt; basic healthcare and education services; financial and postal services; public transportation; and essential energy sources like kerosene and natural gas.