JAKARTA – Indonesia’s Finance Minister Sri Mulyani Indrawati defended the government’s plan to increase the value-added tax (VAT) rate from 11% to 12% starting in January, arguing the measure is crucial to strengthening the country’s state budget. The increase, mandated by a 2021 law, has faced criticism from lawmakers and business groups, who warn that it could weaken consumer spending amid ongoing economic challenges.
Addressing parliament on Nov 13, Dr. Sri Mulyani emphasized that the VAT hike is essential for maintaining fiscal health and ensuring resilience in times of financial uncertainty. “We need to prepare for this policy to be applied with a well-communicated explanation,” she said. “Maintaining the health of the state budget is crucial, especially when we must respond swiftly during financial crises and unexpected events like the pandemic.”
Indonesia has set an ambitious tax revenue target of 2,490.9 trillion rupiah (S$210.86 billion) for the 2025 fiscal year, a 12.3% increase from the current year’s expected tax revenues. The goal, according to President Prabowo Subianto’s administration, is to boost tax revenues by leveraging technology and improving tax collection efficiency rather than consistently raising rates.
Ruling coalition lawmaker Muhammad Kholid voiced concerns that the timing of the VAT increase could stifle economic recovery and urged the government to consider delaying the change. “Raising the tax rate in an economy that is not strong should be the last option,” he said.
Indonesia’s economic growth has remained steady around 5% since the COVID-19 pandemic, with a 4.95% GDP growth rate in the third quarter. Critics argue that the VAT hike could put undue pressure on consumers and small businesses, potentially slowing down this momentum.