Jakarta. The government will roll out an income tax incentive package for people working in the labor-intensive industries as a means to cushion Indonesia’s middle class from the value-added tax (VAT) hike.

In about two weeks from now, the VAT is set to rise from the current 11 percent to 12 percent. The tax hike would leave out staple food and public transport, among others. The government has also set aside approximately Rp 827 trillion ($51.4 billion) in stimulus packages to reduce the higher VAT impact. This includes a government-borne income tax for labor-intensive industry workers who earn no more than Rp 10 million ($622.2) a month.

“We do pay attention to the Indonesian middle class. So we will grant government-borne income tax for labor-intensive industry workers whose monthly salary is between Rp 4.8 million and Rp 10 million,” Economic Affairs Minister Airlangga Hartarto told reporters in Jakarta on Monday.

The term “labor-intensive industry” mainly refers to sectors that mainly rely on manpower for its operations. According to Airlangga, this includes furniture and footwear industries, among others. The layoff-hit textile industry, which is currently struggling against a flood of cheap Chinese imports, also falls into this labor-intensive sector category.

President Prabowo Subianto has greenlit a nationwide 6.5 percent provincial minimum wage increase for 2025. The provincial minimum wage in Indonesia’s most modern city Jakarta, is set to jump from Rp 5.07 million to Rp 5.4 million next year. 

The government’s decision to raise the VAT has raised public scrutiny. Economist Jahen F. Rezki not long ago warned that the VAT increase could shrink Indonesia’s middle-class population. About 8.5 million people have fallen out of the middle class category in 2018-2023. The archipelagic country now has 52 million middle-class citizens.

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