Knock! Get ready, VAT will increase next year

The House of Representatives (DPR) passed one of the most ambitious tax reforms on Thursday (7/10). The tax overhauls include increasing the value added tax (VAT) rate next year, a new carbon tax and canceling plans to cut corporate taxes.

Minister of Law and Human Rights Yasonna Laoly said the law aims to optimize government revenues and improve tax compliance, after the state treasury suffered a heavy blow in 2020 due to the COVID-19 pandemic.

Menkumham Yasonna Laoly.  (Photo: Indra Yoga)

Minister of Law and Human Rights Yasonna Laoly. (Photo: Indra Yoga)

But some business groups and analysts have questioned the timing of the planned tax hikes, as the economic recovery from the pandemic looks still fragile.

Based on the copy of the law obtained ReutersThe law mandates the sales VAT rate on almost all goods and services to increase to 11 percent in April 2021 from the current 10 percent. The VAT rate will again increase to 12% in 2025.

The law will also keep the corporate tax rate at around 22 percent, compared to a previous plan of cutting it to 20 percent next year.

Other measures approved by the House of Representatives include higher income tax rates for the rich, income tax cuts for the average person, a new carbon tax and a new tax amnesty program.

Only one of nine political parties opposed the passage of the law in the parliament controlled by President Joko Widodo’s coalition party.

“The COVID-19 pandemic has given new momentum and perspective in reorganizing… the tax system to be stronger,” said Yasonna.

The government has made several concessions from its original proposal. Initially, the government tried to increase VAT to 12 percent at once and proposed a minimum tax for loss-making companies suspected of tax evasion.

“Indonesia’s revenue dynamics are likely to get a boost from the proposed tax reforms depending on when these are implemented,” said Radhika Rao, a DBS economist, noting that next year’s deficit may be better than the budgeted 4.85 percent of gross domestic product (GDP).

“A gradual increase in VAT rates will not burden consumers too much, considering that the post-pandemic recovery will be fragile and uneven,” he added. [ah/rs]

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