12% VAT Increase: There’s More to Taxes Than Being Revenue-Oriented

Founder of DDTC Darussalam (right) and Director of Tax Dissemination, Services, and Public Relations, Directorate General of Taxes (DGT) Dwi Astuti in the talk show Jendela Negeri: Pajak untuk Negeri broadcast live by TVRI on Tuesday (2/12/2024).

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VAT, VAT rate, 12% VAT, tax rate, DPR, 11% VAT, HPP Law, Darussalam

JAKARTA, DDTCNews - The plan to increase the Value Added Tax (VAT) rate from 11% to 12% must be viewed comprehensively. This is due to the fact that there is more to tax collection than just being state-revenue-oriented, but also to the granting of fiscal facilities for the community.

The founder of DDTC Darussalam reminded that tax collection has, to date, played a pivotal role in mitigating various economic challenges. For instance, when the Covid-19 pandemic struck, taxes became a key instrument for the government in distributing subsidies to the community.

“Taxes, which were initially revenue-oriented, are now not solely revenue-oriented but are targeted at creating a positive impact. During the pandemic, for example, how were, free vaccines, social aid funded? Many of these facilities were provided [through tax revenues],” Darussalam stated in the talk show Jendela Negeri: Pajak untuk Negeri, which was broadcast live by TVRI on Tuesday (2/12/2024).

Darussalam further explained that the granting of fiscal facilities or subsidies inevitably leads to potential revenue foregone. This implies that tax collection itself is designed based on taxpayers’ financial capacity and adjusted to current economic conditions.

“Ultimately, this tax policy must be seen through a helicopter view. As such, the point of view must be broad and cannot be assessed in isolation,” Darussalam continued.

Further, Darussalam pointed out that VAT is a type of tax that causes relatively minimal economic distortion. He revealed that the current VAT system offers VAT facilities for taxable goods and services that benefit the wider community as well as relatively high taxable person (Pengusaha Kena Pajak/PKP in Indonesian) threshold in Indonesia.

The two schemes, the VAT and high taxable person threshold facilities have contributed to significant tax expenditures. The government recorded a total tax expenditure of IDR132.78 trillion in 2022, projected to reach IDR 178.74 trillion by 2025.

“In other words, approximately 40% of total tax expenditure is oriented towards purchasing power and households,” Darussalam explained.

Addressing the mixed public response to the plan to increase VAT to 12%, Darussalam acknowledged that there are pros and cons to tax collection: it can feel burdensome at times, but ultimately, tax revenues contribute to the overall welfare of the community.

“There are always advantages and drawbacks, but at the end of the day, this country must be self-reliant. It must sustain and finance its operations at its own expense, from taxes. The choice is either independent financing or relying on alternatives, such as loans?” said Darussalam.

As widely recognised, the government plans to increase the VAT rate from 11% to 12% starting 1 January 2025. This policy is expressly stipulated under Law 7/2021 concerning the Harmonisation of Tax Regulations (HPP Law), increasing the VAT rate from 10% to 11% in April 2022.