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Increment in Value-Added Tax: Too Early?

Minister of Finance of Indonesia, Sri Mulyani, tends to increase the value-added tax (VAT) from 10% to 12% by early 2022. This value-added tax policy is written in the fifth revised bill document of Law  No. 6 in 1983 about general provisions and tax procedures. The increase of VAT is written in policy draft number 7 "The increase of VAT is 12%". Furthermore, the government added multiple tax rates in policy draft number 7a "VAT may be subject to different rates depending on the type of goods and services." This increase of VAT would undoubtedly impact the price level of goods and services and would reduce purchasing power in society. Substantively, this uproarious government plan to increase the VAT had been much discussed from May 2021, as on Monday (5/17), The Deputy Minister of Finance of Indonesia, Suahasil Nazara stated, "The overall recovery momentum is balancing. Society and the business world are improving, state spending continues to encourage growth, debt is moderated, and tax revenues must also increase." In addition, Tax revenue is one of the keys to minimize debt from government spending. An increase in VAT is one of the solutions to that problem. On the other hand, Fajry Akbar, tax observer at the Center for Indonesia Taxation Analysis (CITA) said, during the economic recovery from COVID-19 the decisions taken had to be careful. Assessing the government's proposal to increase the Value Added Tax (VAT) rate is the optimum decision considering the government needs to increase their tax revenue and this pandemic situation.

The increment in VAT tax significantly impacts goods and services prices, causing them to start rising. During an interview with CNBC Indonesia, the Chairman of the Kamar Dagang dan Industri Indonesia (Kadin) Benny Soetrisno, stated that "the addition of value-added tax will affect price inflation (a rise in product and services price)." In comparison to the early days of the COVID-19 pandemic, when the outbreaks weakened society's purchasing power, the government had done tremendous work on the recovery phase and has resulted in a significant rise in society's purchasing power. However, the Minister of Finance's decision to hike VAT would reduce purchasing power once more. Pitter Abdullah, a CORE economist, agrees that raising the VAT may not be the best course of action for governance since it might backfire and block the ongoing economic recovery, as he stated to CNBC Indonesia Monday (6/8). As we can conclude, the increases in the VAT tax may also act as a negative catalyst to Indonesia's economic recovery. However, from the government's perspective, raising the VAT is a measure for the rally itself, as they began to sort out the impact from COVID-19 Pandemic's Tax Relaxation at the beginning of 2020. In Addition, the multi-tariff VAT plan is also considered in this increment, meaning that the government sets a lower tax for society's basic needs and a higher tax for superior products. This strategy has the potential to eliminate tax collection for those in the lowest income category. At the same time, due to the significant economic risk associated with the plan, there are still Pros and Cons for VAT tax increment.

The increase in VAT will give off negative sentiments to Indonesia’s stock market. Panin Security TBK (PANS) analyst, Indra Then, said that the increase in VAT can push movements of the IHSG because it would have given direct effects towards the burden carried by various companies, including issuers in Indonesia’s Stock Exchange. Indra explained on Tuesday (6/8) how “Worrying it is because of the domestic pressure that the 12% rise in VAT gives,” and how “It should be held off.” He also said that since Indonesia is still on the brink of recovery from the effects of COVID-19, a push in the stock market is highly needed. If the VAT increases, then inflation will occur and consumption growth will be hampered. This, of course, contradicts one of the government’s main focuses that is to increase the consumer’s buying power. Corporations will be directly affected and thus giving off negative sentiments towards the stock market. If this happens, it would be such a shame to remember that the stability of the stock market is one of the keys to economic recovery. All in all, though it is still not clear when the VAT will have its increase, an increase itself will need to be thought out through and through by the government. There are just too many risks and effects on something way bigger.


CNBC Indonesia

CNN Indonesia

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