Indonesia has just nerfed its economic backbone – micro, small, and medium enterprises – by increasing VAT to 12% from 11% for most goods and services in the new year.
That’s the view of economists spoken to by MONIIFY since those running the micro to medium enterprises that employ the vast bulk – 97% – of the Indonesian workforce, and contribute more than 60% of the country’s economy.
Why? To put it simply, because of the domino effect -> Raw materials ↑ = Cost price ↑ = Selling price ↑ = consumer spending ↓.
“The 12% VAT will vastly impact all kinds of goods, including electronics, automotive and its spare parts,” Bhima Yudhistira Adhinegara, executive director at Center of Economic and Law Studies (CELIOS) told MONIIFY.
David Sumual, chief economist at Bank Central Asia, said that rising domestic prices could lead consumers to look abroad for cheaper substitutes for staples such as food and household products.
And that’s not good news for local businesses. Household consumption accounts for more than half of Indonesia’s economic activity.
Read more: Indonesia business owners get sucker punched
However, many may opt to delay their spending and instead save or invest, Sumual added – which in turn could be good news for banks or asset managers. Banking counters led gains after the announcement on Monday, with Bank Rakyat Indonesia, Bank Mandiri and Bank Central Asia among the winners.
The bigger picture
The new tax will apply to everything except staple food items and services such as public transport, education and medicine. While the government has attempted to cushion the blow with incentives, they’re not new. Many of the incentives are temporary, and have already been in place in the current tax regime.
Sumual said that Indonesia has an over-complicated tax system, especially when it comes to VAT. Introducing a simpler system could be a productive move in terms of attracting more investors and improving compliance.
Indonesia needs more money to fund President Prabowo Subianto’s campaign promises – and increasing the VAT is seen as one of fastest and easiest way to do so. He aims to boost the government coffers from 10% to 18% of GDP – an additional $100 billion.
However, Sumual said the government can’t just raise taxes without supporting businesses and attracting investment. “Tax revenue follows the economic expansion,” he said. “If at a point we increase the tax, but the economic condition is at a downward momentum, tax revenue will drop even more.”
