Jakarta. The Indonesian government is likely to delay the planned increase in the Value-Added Tax (VAT) rate to 12 percent, which was initially scheduled to take effect on January 1, 2025, according to Luhut Binsar Pandjaitan, Chair of the National Economic Committee (DEN).

Luhut, who previously served as the Chief Investment Minister, explained that the delay is intended to allow the government time to implement social assistance measures for the middle class before enforcing the VAT hike.

“It is almost certain that the VAT increase will be postponed,” Luhut said in Jakarta. “Before the 12 percent VAT comes into effect, we need to first provide stimulus to those who are economically challenged.”

Many economists believe that the VAT hike would erode the purchasing power of Indonesia's middle class, which is still struggling to regain its footing following the COVID-19 pandemic.

Luhut said that the government is considering using social assistance (BLT) funds to provide electricity subsidies as a way to offset the VAT hike. The cash-based BLT will be redirected to electricity subsidies. These funds have already been earmarked in the state budget, and the government is finalizing the distribution plan.

"We will allocate it to electricity. If given directly to the people, there’s a risk it could be misused for gambling," he said.

As the chair of the DEN, Luhut plays a key role in advising the government on national economic policies, a position that holds influence over the direction of future economic strategies.

The proposed VAT increase has been met with significant opposition from both the public and businesses, with many concerned that it will further reduce purchasing power and place additional strain on the economy. Luhut attributed much of the backlash to a lack of dissemination.

“People don’t fully understand the structure of this tax increase yet,” Luhut said.

The Finance Ministry has defended the VAT increase, asserting that it is necessary to stimulate the economy. Despite this, many have called for a delay in the implementation of the hike.

Dwi Astuti, Director of Public Relations at the Directorate General of Taxes, said that the government is implementing several complementary policies to ensure the VAT increase benefits the public. These include the Harmonization of Tax Regulations Law (UU HPP), which raises the taxable income threshold for individuals and exempts micro, small, and medium enterprises (MSMEs) with annual turnovers up to Rp 500 million from income tax.

“To mitigate the impact of the VAT increase, essential goods and services will remain VAT-free,” Dwi said. “This exemption reflects the government’s commitment to safeguarding household purchasing power.”