May 10, 2021


INDONESIA: Finance wants to raise the VAT rate but will face stiff opposition

BY Bob Herrera-Lim

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The government will discuss with parliament a possible increase in the current VAT rate of 10%, according to a presentation last week by Finance Minister Sri Mulyani Indrawati, although she did not specify what the target rate would be. In addition, the government is considering a multi-tier VAT system, but this would require a more difficult legislative amendment. These proposals will likely face widespread opposition from politicians and the private sector, who will claim the change will hurt consumption. The hike is therefore not assured — at least for next year, although Indrawati may use the multi-rate proposal as a bargaining tool.

Under a 2009 amendment of the 1983 VAT law, the government can set the VAT rate anywhere from 5% to 15% through regulation — even though the current 10% rate has never been changed. However, the law also requires the government to first confer with parliament before making such a change and in the context of the preparation of the state budget.

Separately, the finance ministry has been seeking a reduction in the turnover threshold for small and medium enterprises to be subject to VAT. In 2014, this amount was raised to IDR 4.8bn (USD 340,000) from the previous IDR 600mn (USD 56,000). Still, it caused a substantial decline in the VAT-to-GDP collection ratio, a number currently equal to the figure of smaller neighbors Malaysia and Thailand despite Indonesia having a higher VAT rate. One estimate is that the government only collect two-thirds of the potential VAT receipts.

Last year, Sri Mulyani promised to return the annual budget deficit to below 3% of GDP by 2023, from the estimated 6% last year — and the latest target according to the fiscal policy office of the ministry of finance is 2.71% to 2.97% of GDP. The forecast for the deficit is 5.7% for 2021 and 4.51% to 4.85% for 2022.

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