By Stefanno Sulaiman and Bernadette Christina
JAKARTA (Reuters) -Indonesia on Monday decided to go ahead with a wide-ranging increase in the value-added tax rate to 12% next year, reversing a plan to only apply the hike to luxury goods, but will introduce measures to soften the blow on lower-income earners.
By law, the value-added tax (VAT) rate is scheduled to increase by one percentage point to 12% starting Jan. 1, but there has been growing public pressure to delay it, prompting lawmakers to propose a selective VAT hike.
The finance minister said as part of the increase, VAT will be charged for the first time on premium-quality food and services, including international schools and high-end hospitals.
“In line with the principles of justice, the 12% VAT is also imposed on luxury goods and services consumed by people who can afford those,” Finance Minister Sri Mulyani Indrawati said in a press conference with other economic ministers.
Staple foods will remain exempt from VAT, while cooking oil sold under a government programme, sugar for industry and wheat flour will continue to be taxed at 11%.Senior economic minister Airlangga Hartarto said the government would offer up to 40 trillion rupiah ($2.50 billion) of support measures to soften the impact of VAT hike.
For middle-income households, the government would reduce electricity tariffs by 50% for two months, Airlangga said, while employees in labour-intensive industries earning up to 10 million rupiah a month would not pay income tax.
The VAT exemption on property purchases worth up to 5 billion rupiah was extended in full to the end of June 2025, and then there will be a 50% exemption until the end of 2025.
The government also extended existing tax incentives for battery-based electronic vehicles (EVs), and for hybrid EVs announced a new three percentage-point cut in the luxury sales tax, which ranges from 6% to 12%.
Industry minister Agus Gumiwang Kartasasmita said Citroen, China’s BYD and GAC Aion, who have committed to building EV plants in Indonesia, would be exempt from import duty and get luxury tax sales and VAT cuts on their vehicles.
President Prabowo Subianto has said he wants to boost tax revenue to 18% of gross domestic product from around 10% currently, adding about $100 billion in additional tax revenue.
($1 = 16,010 rupiah)
(Reporting by Stefanno Sulaiman; Writing by Ananda Teresia; Editing by Martin Petty and John Mair)
