DIGIVESTASI - VAT Increase to 12% in 2025: LPEM FEB UI Highlights Impact on Poor Households, The Institute for Economic and Social Research of the Faculty of Economics and Business, University of Indonesia (LPEM FEB UI), has highlighted the significant impact of the planned Value Added Tax (VAT) increase to 12% in 2025 on household expenditures, particularly for impoverished communities. In its report titled *Indonesia Economic Outlook 2025*, LPEM FEB UI underscores the potential rise in household spending burdens resulting from this policy.  

According to the report, during the period from 2013 to 2019, the poorest households faced an average VAT burden of 3.93% with the 10% VAT rate. In comparison, wealthy households bore an average burden of 5.04%. However, after the VAT rate was raised to 11% in 2022, there was an increase in the progressivity of the VAT burden across all households.  

"From 2022 to 2023, the average VAT burden for the poorest 20% of households rose to 4.79%, while for the richest 20%, it increased to 5.64%," the report stated, as cited on Saturday (November 16, 2024).  

VAT Increase Considered Regressive
LPEM FEB UI found that the VAT increase from 10% to 11% in 2022 had a regressive impact, with poor households experiencing a sharper rise in their spending burden compared to wealthier groups. Data reveals that the poorest households saw an increase of 0.86 percentage points in their VAT burden, while the wealthiest households faced only a 0.71 percentage-point rise.  

This raises concerns that the planned VAT hike to 12% in 2025 could exacerbate spending pressures on poorer households.  

Sri Mulyani: VAT Increase in Line with HPP Law Mandate
Finance Minister Sri Mulyani Indrawati previously stated that the VAT rate increase to 12% is part of implementing Law No. 7/2021 on Harmonization of Tax Regulations (HPP). Article 7, paragraph (1) of the HPP Law stipulates a gradual VAT rate increase—from 10% to 11% in 2022, culminating at 12% in 2025.  

"With this legal framework in place, we need to prepare its implementation carefully to ensure this policy is executed effectively," Sri Mulyani said during a Working Meeting with Commission XI of the House of Representatives on Wednesday (November 13, 2024).  

Nonetheless, the government is expected to provide a comprehensive explanation of the policy’s impacts and benefits to maintain economic sustainability, especially for vulnerable groups.