In 2025, Indonesia is set to undergo a significant tax change with the implementation of a new Value Added Tax (VAT) policy. This policy will see the current rate of 11% rise to 12%, impacting most goods and services. While essential items like groceries, healthcare and education will be exempted, the increase is expected to affect Indonesian consumers. How will it affect the businesses?
Goods Subject to VAT
Starting January 1, 2025, the Indonesian government has confirmed that it will implement a new Value Added Tax (VAT) policy that will increase from 11% to 12%. The VAT hike will be applied to all goods and services, except for basic necessities, healthcare and educational services, as well as social services. There are also several other types of goods and services that are given VAT exemption to help middle- and low-income people.
VAT is an additional cost that consumers have to pay when buying goods. VAT is not directly paid by consumers to the tax authorities, but rather through companies. In this case, the company selling certain goods and services acting as an intermediary will charge a 12 percent VAT to the consumers. The company then pays the VAT to the Directorate General of Taxes at the Ministry of Finance.
Some of the goods that are currently subject to VAT are purchase of houses and apartments, retail goods, vehicles, electronic devices, telecommunication services (internet), and video streaming services such as Netflix, Amazon Prime, and Disney Hotstar.
How Does VAT Hike Impact Businesses?
The Institute for Development of Economics and Finance (Indef) says that the increase would bring Indonesia to the top of the list of Southeast Asian nations with the highest VAT rates. Indef mentioned that Malaysia’s VAT rate stands at a modest 6 percent. Singapore and Thailand hover around 7 percent, while Cambodia, Laos, and Vietnam at around 10 percent. Indonesia’s VAT would be on par with the Philippines, making it the highest in the region. Certainly, it will affect businesses in Indonesia.
As mentioned above, the subject of this VAT is a company that is registered as a corporate taxpayer. Although the subject of VAT is a company, the rate is collected from the consumer. So, the company is only an intermediary “tax collector” between the consumer and the government. In other words, the company is responsible for collecting VAT from the consumer and then remitting it to the tax authorities.
Indonesian businesses are lobbying against the VAT hike. Some of them said that it is better if the government raises corporate income tax instead of VAT because corporate income tax increase targets profits, not consumers. They reason that VAT burdens everyday people. Higher tax means higher prices that can reduce purchasing power from inflation-strained income. Businesses and companies as the intermediary “tax collector” also will get the impact due to lower sales which will lead to lower competitiveness in the market.
Echoing concerns from the business side, economists in Indonesia warn that the VAT hike, despite excluding essential items, only benefits the government at the expense of citizens and industries. That’s why Indonesia’s Chamber of Commerce and Industry urged the government to carefully examine both the current state of economy in 2024 and future economic forecasts for 2025 before implementing the VAT hike to 12%.
Frequent Changes of Tax Law
Indonesia’s tax regulations frequently change from time to time. So it is important for investors and businessmen to stay updated on tax law as the government may adjust rates or introduce new taxes periodically. One thing for sure that is not changing is companies as corporate taxpayers, must submit their annual report by April 30th. Consulting with a qualified tax professional is highly recommended. Especially if your company operates in a complex industry or has a significant tax burden.
Seven Stones Indonesia can assist you in identifying your specific tax obligations and ensuring compliance with this country’s tax regulations. As a matter of fact, we’ll be discussing corporate tax issues at an upcoming event in April. Keep an eye on our website and social media for registration details. In the meantime, feel free to contact Seven Stones Indonesia with any tax-related questions. Our experienced team will be happy to help with your tax planning.
