Starting in 2025, Indonesia introduced an important change to its Value Added Tax (VAT) system by increasing the rate from 11% to 12%. This move aims to boost government revenue, especially as the country seeks to finance large-scale infrastructure projects and public services. However, not all goods and services will be subject to the new 12% rate. Some products and services will still be taxed at the previous rate of 11%. But why is there a disparity, and what are the underlying reasons behind it?

Why Did Indonesia Raise the VAT Rate to 12%

The increase in VAT from 11% to 12% is part of Indonesia’s broader strategy to strengthen its financial position and ensure sustainable economic growth. The government needs more revenue to fund essential services and infrastructure projects, especially after the financial strains caused by the COVID-19 pandemic.

1. Increasing Revenue for Development
   The primary objective of the VAT hikes is to increase the government’s revenue, which will help fund public goods like healthcare, education, and infrastructure. With a rapidly growing population and rising demands on public services, the government has identified VAT as a key tool for securing more funds.
2. Widening the Tax Base
   A higher VAT rate helps broaden the country’s tax base, making the system more equitable. By increasing VAT, the government hopes to rely less on corporate taxes and other taxes that could discourage business activity, ensuring a fairer distribution of the tax burden.
3. Economic Recovery
   After the economic disruption of the pandemic, increasing VAT is also seen as a way to restore fiscal balance. The revenue generated will be critical for economic recovery, funding stimulus measures and support sectors hit hardest by the pandemic.
4. Aligning With Global Trends
   Many countries have moved toward higher VAT or sales tax rates in recent years. Indonesia’s VAT increase is consistent with global fiscal policy shifts as the government seeks new ways to raise revenues and manage its post-pandemic budgets.

Why Are Some Goods and Services Still Taxed at 11%?

While the standard VAT rate has risen to 12%, some goods and services will continue to be taxed at the previous 11% rate. This selective taxation reflects the government’s effort to balance the need for increased revenue with the goal of protecting consumers and supporting certain economic sectors.

1. Essential and Basic Goods
   The 11% VAT rate applies to products considered essential or vital for everyday life, such as food staples, medical supplies, and educational materials. By keeping VAT lower on these items, the government ensures that low and middle-income households aren’t overly burdened by the tax increase.
2. Social Protection Measures
   The 11% VAT on essentials is also part of Indonesia’s social protection strategy. The Government aims to mitigate the cost-of-living pressures on the population, particularly for vulnerable groups, while still achieving fiscal goals.
3. Encouraging Key Economic Sectors
   Certain industries, such as the tourism and hospitality sectors, which are still recovering from the impact of COVID-19, benefit from the 11% VAT rate. This lower rate is intended to stimulate growth and attract foreign investment by making these sectors more affordable and competitive.
4. Gradual Transition and Economic Stability
   The gradual application of the VAT increase is a deliberate approach that allows businesses and consumers to adjust. While the overall VAT rate has increased to 12%, the government has maintained the 11% rate on some products as a way to avoid abrupt price hikes in sensitive sectors.
5. Complexities in Implementation
   Indonesia’s economy is diverse, and different sectors have different tax needs. The 11% rate serves as a transitional measure for industries that require more time to adjust to the new tax framework. Additionally, certain products may be excluded from the higher 12% rate due to their classification or economic significance.

How Does This Rate Change Impact Your Business?

The VAT rate in Indonesia increased to 12% on January 1st, 2025. As these changes happen, businesses in Indonesia may experience increased costs for goods and services, impacting their overall profitability. To maintain profitability, businesses may need to adjust their product or service prices to reflect the higher VAT rate, and this adjustment potentially leads to decreased sales for some businesses. Other than that, businesses will need to adapt their accounting and invoicing systems to reflect the new VAT rate.

Businesses in Indonesia may consider these actions:

1. Review Pricing Strategies: Analyze cost structures and adjust pricing models to maintain profitability while remaining competitive.
2. Improve Efficiency: Explore cost-cutting measures to offset the impact of increased costs.
3. Enhance Customer Relationships: Maintain transparent communication with customers regarding price adjustments.
4. VAT Compliance: Ensure accurate VAT calculations and timely filings to avoid penalties.
5. Stay Informed: Keep abreast of any changes to VAT regulations and their implications for your business.
6. Consult with Tax Professionals: Seek advice from qualified tax advisors to navigate the complexities of the VAT increase and ensure compliance.

Conclusion

Indonesia’s VAT update in 2025, which raises the rate to 12% is a critical move to secure the country’s long-term fiscal health and to address growing infrastructure needs. While the increase will help generate much-needed revenue, the selective 11% rate on certain essential goods ensures that vulnerable groups are protected from excessive taxation.

In contrast, Vietnam’s decision to reduce VAT is aimed at stimulating economic recovery in the short term, boosting consumption, and encouraging businesses to invest in growth. While both countries are facing similar challenges in the aftermath of the pandemic, their fiscal strategies differ based on their unique economic goals and priorities.

As Indonesia moves forward with its VAT increase, it will be crucial to monitor the effects on both businesses and consumers. The country’s success in implementing this tax policy will depend on how well it can balance the need for increased revenue with the goal of maintaining economic stability and growth.

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