The increase in the Value Added Tax (VAT) rate to 12% starting January 1, 2025, could have a significant impact on the public. Although stipulated in Law No. 7 of 2021 on the Harmonization of Tax Regulations (HPP), the government actually has the flexibility to set VAT rates between 5–15%. This policy comes amid weakening household economic conditions, with consumption growth of just 4.91% (y-o-y) in Q3 2024 and -0.48% (q-to-q), deflation for five consecutive months (May–September 2024), and MSME revenues plunging by as much as 60%, according to a Bank BRI report. Meanwhile, potential revenue of up to Rp300 trillion from carbon taxes, illegal mining, and palm oil tax evasion has yet to be optimized.

With the 12% rate, Indonesia now has the highest VAT rate in ASEAN, alongside the Philippines, surpassing Malaysia (8%) and Singapore (9%). This policy risks reducing people’s purchasing power, particularly among Gen Z and lower-middle-income groups, who will face a greater cost-of-living burden, lower incomes, increased debt, and greater reliance on the informal sector, such as thrifting and personal shopping services. CELIOS recommends more pro-people fiscal policies to support economic recovery rather than placing further pressure on the public.

The increase of Indonesia’s Value Added Tax (VAT) to 12% starting January 1, 2025 will have a significant impact on the public. Although mandated under Law No. 7 of 2021 on Tax Regulation Harmonization, the government has flexibility to set VAT rates between 5-15%. The timing is particularly challenging as household consumption growth slowed to 4.91% year-on-year in Q3 2024, turned -0.48% quarter-to-quarter, deflation occurred for five consecutive months (May-September 2024), and SME revenues fell by up to 60%, according to Bank BRI reports. Meanwhile, potential revenue from carbon taxes, illegal mining, and unpaid palm oil taxes—up to IDR 300 trillion—has yet to be optimized.

With the 12% VAT, Indonesia now shares the highest VAT rate in ASEAN with the Philippines, exceeding Malaysia (8%) and Singapore (9%). This policy risks reducing purchasing power, especially for Gen Z and lower-middle-income groups, who will face higher consumption burdens, lower disposable income, rising debt, and greater dependence on informal sectors such as thrifting and personal shopping services. CELIOS recommends more people-focused fiscal policies that support economic recovery rather than adding pressure to households.

VAT_12_A_Devastating_Blow_to_the_Wallets_of_Gen_Z_and_the_Lower_Middle_Class_CELIOS_2024 Download

VAT 12% - A Severe Blow to the Wallets of Gen Z and the Lower-Middle Class_Eng Download