Jakarta. The government’s plan to raise the value-added tax (VAT) to 12 percent will negatively impact exports, reduce household income, and increase unemployment, according to an economist from the Institute for Development of Economics and Finance (Indef).

The government confirmed it will increase VAT by 1 percentage point starting January 1, as mandated by the taxation law passed in 2021.

Esther Sri Astuti, an Indef economist, warned that the VAT hike would trigger a series of adverse effects, including rising living costs, inflation, and weakened purchasing power. Additionally, companies may be forced to lay off workers to cut costs.

"We are heading toward those consequences because raising VAT to 12 percent will decrease our exports by 1.41 percent and lower real income by 0.96 percent, while pushing the unemployment rate up by 0.94 percent," Esther said, citing Indef's research.

She explained that the VAT increase would affect all sectors by driving up production costs and, consequently, sale prices, eroding consumer purchasing power.

"A 1 percentage point VAT hike will impact all sectors, as producers will pass the increased costs onto consumers. Prices are expected to rise by 0.81 percent in the services sector, 0.71 percent in the food and beverage sector, and 0.6 percent in the manufacturing industry, among others," she said.

Esther also noted that when VAT was increased from 10 percent to 11 percent in April 2022, the annual inflation rate climbed by 0.95 percentage points.

"Another VAT hike will add inflationary pressures in 2025," she added. "Ultimately, economic growth will slow, given its heavy dependence on household consumption."