The Indonesian government has announced an increase in the Value Added Tax (VAT) rate to 12% starting January 1, 2025. This adjustment is expected to impact various sectors, notably affecting the middle class. Economists predict that this change will lead to an additional monthly expenditure of approximately IDR 350,000 for middle-class households.

Impact on Middle-Class Expenditures

Bhima Yudhistira, Director of the Center of Economics and Law Studies (Celios), highlights that the VAT increase will affect essential goods and services, including food and transportation. The VAT is considered a regressive tax, meaning it impacts all income groups equally. Therefore, the middle class will experience a significant rise in living costs due to this policy. 

Potential for Inflation

The VAT hike is anticipated to contribute to inflation, particularly in daily consumer goods such as clothing, hygiene products, and medications. This inflationary pressure could further strain household budgets, especially for those not receiving targeted assistance. 

Government Stimulus Measures

In response to these challenges, the government has introduced several stimulus packages to mitigate the impact of the VAT increase:

• Food Assistance: Distribution of 10 kilograms of rice per month in January and February 2025 to support low-income households.
• VAT Exemptions: Certain essential commodities, such as wheat flour, sugar for industry, and subsidized cooking oil (MinyaKita), will have a 1% VAT borne by the government.
• Electricity Discounts: A 50% discount on electricity bills for households with usage below 2,200 VA during the first two months of 2025.
• Employment Support: Enhancements to the Job Loss Guarantee (JKP) program, including increased benefits and extended claim periods, to assist workers affected by potential layoffs.
• Support for SMEs: Extension of the 0.5% final income tax incentive for small and medium enterprises with annual revenues below IDR 500 million.

Long-Term Considerations

While these measures aim to alleviate immediate burdens, economists suggest that the government should explore alternative policies to enhance state revenue without disproportionately affecting the public. Options include broadening the tax base, implementing wealth taxes, and addressing tax evasion. Such strategies could provide a more sustainable solution to fiscal challenges.

Conclusion

The VAT increase to 12% is a significant policy change with widespread implications for Indonesian society. While the government's stimulus packages offer temporary relief, careful evaluation and potential adjustment of these policies will be crucial to ensure they effectively support the middle class and the broader population in the long term.