VAT Expansion in Indonesia Targets Premium Goods, Critics Warn of Economic Strain
Jakarta. The government’s plan to raise Indonesia’s Value-Added Tax (VAT) rate to 12 percent starting January 2025 will apply to nearly all taxable goods, with an expanded list now including items that were previously VAT-free. According to Muhammad Andri Perdana, Research Director at Bright Institute, the new regulation increases, rather than reduces, the number of goods subject to the tax.
Andri explained that essential goods, such as rice and public transportation, are exempt from VAT under Government Regulation No. 49 of 2022. However, the new policy classifies some previously untaxed goods, such as premium rice, imported salmon, VIP hospital rooms, and high-tier private education services, as taxable with the 12 percent rate.
Government Regulation No. 49 of 2022 divides non-taxable goods into two categories: certain taxable goods (BKP) exempted from VAT and goods not subject to VAT or Sales Tax on Luxury Goods (PPnBM). Examples of BKP exempted from VAT include polio and COVID-19 vaccines, textbooks, scriptures, and construction services for places of worship. Meanwhile, BKP not subject to VAT includes essential items such as basic food staples (excluding cooking oil), seafood, livestock, industrial machinery, and electricity below 6,600 VA. Finance Minister Sri Mulyani announced on Monday that basic necessities like rice, meat, fish, eggs, vegetables, and milk will remain exempt from VAT.
“These goods have been exempt from VAT for years, dating as far back as Government Regulation No. 146 of 2000,” Andri said.
However, the government’s revised policy reclassifies certain premium goods and services that previously shared non-taxable status. These include premium rice, salmon, high-capacity electricity above 3,500 VA, VIP hospital rooms, and private education services. Under the new rules, these items will now be taxed at 12 percent, while only non-premium categories remain VAT-free.
Andri criticized the government’s framing of the VAT hike as targeting luxury goods, arguing that it imposes new burdens on items that had long been tax-free.
The expansion of VAT coverage raises concerns among analysts, who warn it could strain household budgets and increase inflation. Critics have called on the government to reconsider the regulation or provide clearer measures to minimize its impact on consumers.
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.
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