Indonesian parliament proposes VAT hike only for luxury items

JAKARTA — Indonesia's parliament said on Thursday (Dec 12) it had proposed to the government to only raise the current value-added tax (VAT) rate for luxury items to avoid an impact on low income people.

By law, VAT is set to rise by one percentage point to 12 per cent starting Jan 1, 2025 to improve the country's revenue collection. However, public demand for a delay has been mounting as it could hurt their purchasing power.

"Things classified as luxury items get the 12 per cent VAT rate, whether imported or made here ... so upper middle class people who have the purchasing power for those get the increase," Senior lawmaker Mukhamad Misbakhun told reporters.

He made the statement shortly after some senior lawmakers discussed the proposal with President Prabowo Subianto. With that proposal, the lawmakers agreed the VAT hike will be implemented as scheduled.

Misbakhun said the proposed items are similar to the products that have been charged with luxury sales tax, which currently imposed on certain houses, cars, airplanes and yachts.

He added the luxury tax, which currently imposes in range of 10 per cent to 200 per cent, will still be applied on top of the VAT.

In response to the proposal, government said it would next week announce its response alongside an economic package that will include stimulus measures to mitigate the impact, its senior economic minister Airlangga Hartarto said.

"What I can say for now is key staple items are exempted from VAT, including costs related to education and health," he said adding government will consider the impact to people's purchasing power in its decision next week.

Almost all products and services are currently subject to VAT, but staple foods and some items and services related to education and health are exempted.

The government has said the VAT hike is needed to improve the structural health of the budget, and a state bank has said it will have only a small impact on growth.

Jakarta has also said will introduce fiscal stimulus for labour intensive industry and some assistance for poor people to pay electricity bills.

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