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Indonesia’s VAT Increase: A Closer Look at Its Implications
The Implication of the Higher Luxury Goods Tax and Why the Effective Rate Stays at 11% for Some Goods

Indonesia’s VAT Increase: A Closer Look at Its Implications

February 2025

Following Minister of Finance Regulation No.131 Year 2024 dated 31 December 2024, Indonesia raised its Value Added Tax (VAT) rate on certain luxury goods from 11% to 12%, effective January 1, 2025. This increase is a significant fiscal policy shift and is part of the government’s broader strategy to boost state revenue, fund infrastructure projects, and address social welfare needs. While the measure is seen as necessary by many economists, it has sparked debates among businesses, consumers, and policymakers.

“The 12% VAT rate is applicable to the import and domestic delivery of luxury taxable goods which are currently subject to the Luxury-goods Sales Tax. These include some motor vehicles, private residences with a selling price of over IDR 30 billion, private aircraft, luxury private cruisers, etc. While for others goods and services the effective VAT rate is still 11%. As usual, the Input VAT related to these transactions can be credited,” says Mr. Dicky Darmawi, tax division head at Moores Rowland Indonesia.

“The VAT adjustment is part of a series of tax reforms aimed at aligning Indonesia’s tax policies with global standards. A 12% VAT rate on luxury items places Indonesia closer to the average rate in Southeast Asia, enhancing its competitiveness in the region while ensuring sufficient funds for critical public services.”

Reasons Behind the Increase

The VAT hike aligns with Indonesia’s ongoing efforts to improve fiscal sustainability. The government has emphasized the need for higher revenue to support its ambitious development agenda, which includes infrastructure expansion, healthcare improvements, and poverty alleviation. The COVID-19 pandemic significantly strained public finances, leaving a gap that necessitated a more robust revenue base.

Impact on Businesses

The business community has mixed reactions to the VAT increase. On one hand, large corporations with substantial resources are likely to adapt to the change with relative ease. However, small and medium enterprises may struggle with the additional tax burden, potentially leading to higher operational costs and reduced profit margins.

Some sectors, such as retail and consumer goods, are particularly sensitive to changes in VAT rates. Increased costs may force businesses to either absorb the tax or pass it on to consumers, potentially affecting demand. This could lead to slower economic growth in the short term, as consumer spending accounts for a significant portion of Indonesia’s GDP.

Economic and Social Implications

The VAT increase marks a pivotal moment in Indonesia’s economic journey. While the measure is expected to strengthen public finances and support development goals, its success hinges on effective implementation and complementary policies.

As Indonesia navigates this transition, stakeholders across the spectrum—from businesses to consumers to policymakers—must work together to adapt to the new fiscal landscape. The coming months will reveal how well the country balances the need for increased revenue with the imperative of social equity.