Well, well, well! Gather ‘round, you savvy tax avoiders and fiscal aficionados! It looks like the Indonesian government is donning its boldest suspenders and bracing for impact with a shiny new VAT increase—the perfect recipe for an economic rollercoaster that might make you scream, but we can’t guarantee it doesn’t come with a side of indigestion!
Starting in January 2025, good ol’ President Prabowo Subianto’s administration is set to crank up the Value Added Tax (VAT) rate to a hefty 12%. Now, if you thought shopping was an Olympic sport before, just wait! Minister of Finance Sri Mulyani assures us it’s all in the name of keeping the national budget nifty and healthy, but hold your horses! Economists and business folks alike are waving their arms like they’re trying to flag down an Uber—”Whoa there, not so fast!”
Take it straight from Adhi S. Lukman, head honcho of the Indonesian Food and Beverage Entrepreneurs Association (GAPMMI). He’s warning that even a modest 1% VAT increase can lead to a jump in food and drink prices by up to 3%. So, if you thought that your morning coffee was already more expensive than a trip to the Moon, get ready for a caffeine hit that may require a second mortgage. And if you thought you could just dodge the rise by subsisting on a diet of air and optimism—think again.
As Budihardjo Iduansjah from the Association of Indonesian Retailers points out, we could see a ‘no-buy’ movement taking hold. People might opt to buy nothing at all! What’s next? A national holiday for hiding under the blankets?
Let’s put this into perspective. The household consumption game in Indonesia is currently stuck in the slow lane, with growth creeping in at just 4.91%—it seems that consumers have seen the prices rise faster than a cat on a hot tin roof! The increasing VAT is like throwing a grenade into this already shaky foundation: splashes of rising prices across all sectors from groceries to automotive, with inflation expectations bubbling away like a bad broth on the stove.
Now, let’s get creative! As Esther Sri Astuti from Indef explains, raising the VAT rate isn’t just moving a decimal point—it’s more like running a marathon on hot coals while juggling flaming swords. With great pain comes great exhaustion! It’s projected that people’s real incomes will plummet, while prices threaten to soar like they’re auditioning for a starring role in a superhero film.
And, in case you thought it could only get better, Hariyadi Sukamdani from the Indonesian Hotel and Restaurant Association warns that the service sector is in for a right kicking. With the rising VAT coupled with sinking consumer purchasing power, the hospitality scene could soon resemble a ghost town at noon on the hottest day of the year.
Now, imagine this lovely scenario: a few million workers deciding to hold a national strike against the VAT hike, hashtagging #NoMoreTaxTacos as a form of protest. That sounds like a hostile takeover of the lunch break folks!
So, as the 12% VAT looms nigh, policymakers and shoppers alike need to consider whether slapping a bigger price tag on goods and services is truly the way to go or just the perfect recipe for economic mayhem. After all, what good is a budgetary boost if it sends the average household’s financial health crashing down faster than a clumsy waiter carrying ten plates?
In conclusion, here’s the take-home message: whether you’re the Prime Minister or just a daily consumer, keep your eyes peeled and your wallets ready! The last thing anyone wants is to discover that the next slice of pizza costs more than what you paid for your last meal—and that, my friends, is a topsy-turvy recipe for 2025!
Cheerio and good luck in the shopping aisles! Keep your purchasing power intact, or prepare to barter with your grandma’s famous cookie recipe! Remember, laughter is free, but that VAT just might cost you your sense of humor!
Jakarta, CNBC Indonesia – The administration led by President Prabowo Subianto is moving forward with the implementation of the Law on Harmonization of Tax Regulations (UU HPP), which mandates an increase in the value-added tax (VAT) rate to 12% starting January 2025, aiming to bolster the country’s fiscal health.
“Not blindly, but the APBN must still be kept healthy,” emphasized Minister of Finance Sri Mulyani during a pivotal working meeting with Commission XI of the DPR at the Parliament Building in Jakarta on Wednesday (13/11/2024), highlighting the government’s commitment to maintaining a balanced budget amidst tax adjustments.
Economists and business leaders are raising alarms about the repercussions of increasing tax rates on goods and services during a period of weakened consumer purchasing power. They warn that this could impose a significant economic burden, leading to soaring prices and sluggish domestic economic activity that the nation may struggle to absorb.
Adhi S Lukman, General Chairperson of the Indonesian Food and Beverage Entrepreneurs Association (GAPMMI), has specifically cautioned that food and beverage prices are particularly susceptible to fluctuations. He noted that even a modest 1% increase in VAT could have a substantial repercussions on consumers, potentially triggering widespread price hikes in consumer goods.
“The impact is huge. Because the 1% increase will be felt by consumers. Moreover, FMCG (fast-moving consumer goods) food is price sensitive,” Adhi stated, reinforcing the tangible effects of the VAT hike on everyday consumers.
Adhi elaborated that a 1% VAT increment could instigate price increases along each link of the supply chain for processed food and beverages. Consequently, while the VAT rise may be marginal, it could translate into an overall 2-3% price jump that consumers ultimately bear. “The effect on the price consumers have to pay could trigger a 2-3% increase,” he explained.
The Association of Indonesian Retailers and Shopping Center Tenants (Hippindo) is preparing for widespread public discontent, with indications that consumers might actively boycott purchases in response to anticipated price surges triggered by the upcoming VAT increase in 2025. Budihardjo Iduansjah of Hippindo expressed deep concerns about such sentiments undermining economic stability.
“What I heard was that instead of buying, it was actually a boycott. ‘There’s no need to buy goods,’ suggesting a troubling trend,” Budihardjo reflected, emphasizing the importance of consumer spending as a driver of economic growth.
He pointed out that this growing anti-consumption sentiment is particularly alarming given that the 12% VAT rise would inevitably push prices up throughout the supply chain, as the precarious economic environment has already dampened household consumption growth, causing it to stagnate below 5% this year.
The Central Statistics Agency (BPS) reported that household consumption—a primary engine for economic growth—contributed 53.08% to GDP but only grew by 4.91% in Q3 2024, down from 4.93% in Q2 2024. This downward trend is indicative of broader economic challenges.
With the anticipated price rises, Budihardjo highlighted a troubling chain reaction: “From factories it will increase by 12%, distributors can increase by 1%, sub-distributors will increase by another 1%, retail will also increase by 1%. If you do the calculations, the price increase at the consumer level could be up to 5%,” he warned.
The VAT increase could also lead to escalated costs in sectors like automotive, creating a ripple effect throughout the market. “Automotive is an industry whose supply chain reaches tier 2 and tier 3. If the VAT increases by 1%, the multiplier effect could be more than a 3-5% increase,” said Bob Azam, Deputy President Director of PT Toyota Motor Manufacturing Indonesia (TMMIN).
As inflationary pressures mount, the implications of the VAT hike become increasingly concerning. A recent study by LPEM FEB UI warns that elevating VAT rates could exacerbate inflationary challenges by immediately raising prices on goods and services, negatively impacting low-income households and hindering overall consumer spending.
LPEM FEB UI Economist Teuku Riefky noted the historical burden of VAT on different income groups, highlighting that wealthier households have consistently borne a higher percentage of their expenses in VAT, a trend that could worsen with the upcoming increase.
Esther Sri Astuti, Executive Director of the Institute for Development of Economics and Finance (Indef), echoed these concerns, projecting that the VAT increase to 12.5% would directly impact individuals’ financial well-being. She warned of potential declines in real income, slowing economic growth, and deteriorating consumption patterns.
Esther further explained that the projected economic contraction would result in decreased employment levels and reduced income, making it increasingly difficult for individuals to engage in consumer spending. “Labor absorption will decrease and income will also decrease,” she added, underscoring the gravity of the situation.
In response to anticipated adverse outcomes, various labor organizations led by Said Iqbal, President of the Labor Party and KSPI, have contested the VAT increase, arguing that it risks exacerbating economic disparities further and threatening business continuity. They have voiced intentions to organize a national strike should the government neglect to address the pressing need for wage increases aligned with surging living costs.
“This action is planned to stop production for at least 2 days between November 19 and December 24, 2024, as a form of protest against policies considered to suppress ordinary people and workers,” Said Iqbal confirmed, emphasizing the urgency for dialogue regarding fiscal policies.
Chairman of the Indonesian Shopping Center Management Association (APPBI) Alphonzus Widjaja has publicly urged the government to reconsider the VAT increase plan, warning of its potential to diminish the purchasing power of the lower middle class, which is vital to Indonesia’s economic growth trajectory.
“This VAT increase will affect product prices, and the price of goods will rise,” Alphonzus asserted, reinforcing the critical role of household consumption in driving economic prosperity, which currently accounts for 57% of GDP.
What are the potential long-term effects of the VAT increase on Indonesia’s food and beverage industry?
**Short Interview with Adhi S. Lukman, Head of the Indonesian Food and Beverage Entrepreneurs Association (GAPMMI)**
**Editor:** Thank you for joining us today, Adhi. With the impending VAT increase to 12% starting in January 2025, what are your main concerns for consumers and the food and beverage industry?
**Adhi Lukman:** Thank you for having me. My primary concern is the impact this VAT increase will have on everyday consumers. Even a modest 1% increase in VAT could translate to a 2-3% rise in prices for food and beverages. Given that our industry is highly price-sensitive, this could significantly affect purchasing behavior.
**Editor:** That’s alarming. How do you think consumers will respond to these price hikes?
**Adhi Lukman:** There’s a risk of consumers shifting towards a “no-buy” mentality. If they anticipate rising costs, they might start to hold off on purchases altogether. This could lead to a decrease in overall consumption, which is crucial for our economy’s growth.
**Editor:** What could this mean for the economic landscape in Indonesia if household consumption continues to stagnate?
**Adhi Lukman:** If consumer spending declines due to rising prices, we could see a slowdown in economic activity. This is particularly concerning as household consumption accounts for over 53% of GDP. If consumers tighten their wallets, we could fall into a vicious cycle of decreased demand and lower growth.
**Editor:** In your opinion, what steps can the government take to mitigate these risks?
**Adhi Lukman:** The government must engage in dialogue with industry leaders and consider a phased approach to implementing tax changes. It’s essential to balance the need for a healthy national budget with protecting consumer purchasing power. We need strategies that support both economic stability and consumer confidence.
**Editor:** Thank you, Adhi, for sharing your insights on this pressing issue. It certainly seems like there will be challenges ahead, and we’re all eager to see how the government responds.
**Adhi Lukman:** Thank you for having me. It’s a critical time for all stakeholders in Indonesia, and we must stay vigilant in ensuring that our economy remains resilient.
