Indonesia Pursues Multi-Pronged Growth Strategy

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In recent developments, Indonesia has taken significant steps to address the potential burdens from the implementation of a value-added tax (VAT), aimed at sustaining and stimulating stable economic growthThis newly instituted VAT policy has raised concerns among businesses and consumers alike, prompting the government to outline a series of incentive measures to ease the transition.

As of 2022, the VAT in Indonesia experienced an increase from 10% to 11%. Furthermore, legislation stipulates that beginning January 1, 2025, the VAT will be raised to 12%. Concerns have arisen that this increase could inflate business costs and further suppress consumer purchasing power, which could lead to an accelerated economic slowdownMany stakeholders are now advocating for a delay in the VAT increase due to its potential ramifications.

Ahok, the Chief Marketing Officer of Astra Credit Company, highlighted the impending rise in automobile prices due to increased VAT, which could exert additional pressure on automotive sales

The challenges within Indonesia’s automotive sector are already apparent, with reported sluggishness throughout 2024. Data from the Indonesian Automobile Industry Association reveals a dramatic 14.7% decrease in total car sales from January to November of this year, with only 785,000 units soldIn light of these figures, the association has adjusted its sales outlook for 2024, revising its expectations from 1.1 million units to a more conservative 850,000 units, with a projected 1 million for 2025.

Economic predictions by the Institute for Economic and Financial Development, led by Executive Director Isit Sri Astuti, indicate that the VAT increase could lead to a sharp rise in commodity prices by 9%, further stressing purchasing power and risking a dip in economic growth below the anticipated 5.2%. Notably, household consumption comprises roughly 53.08% of Indonesia's economy, and for the first three quarters of this year, growth in household consumption lagged below 5%. More specifically, the figures show growth rates of 4.91%, 4.93%, and 4.91% across the first, second, and third quarters, respectively

An increase to 12% VAT could result in a potential 0.26% decline in household consumption, further complicating Indonesia’s economic landscape.

Interestingly, the VAT rate in Indonesia remains below the global average of 15.4%, though it is higher than rates in several Southeast Asian nations such as Vietnam, Malaysia, Singapore, and Thailand, where the VAT is still under 11%.

Despite vocal opposition, the Indonesian Minister of National Development Planning, Airlangga Hartarto, stated that the government intends to implement the VAT increase as scheduled while simultaneously introducing 15 fiscal incentive measures designed to safeguard public welfare and sustain economic stabilityData estimates indicate that the VAT increment could yield an additional revenue of approximately 750 trillion Indonesian rupiah by 2025, albeit at the cost of nearly 400 trillion rupiah in new budgeted expenditures for the incentive measures.

The incentive measures encompass a broad array of sectors and specific provisions, particularly concerning adjustments to the VAT framework and tax relief

In the food sector, VAT exemptions are provided on essential items such as rice, meat, fish, eggs, vegetables, milk, and sugar, facilitating stability in food prices and addressing the basic needs of residentsThis initiative aims to alleviate the economic burden on households regarding food procurement, allowing citizens access to affordable staples and subsequently enhancing their quality of life and overall happiness.

In labor-intensive industries, workers earning less than 10 million Indonesian rupiah per month in textiles, footwear, and furniture sectors will be exempted from income taxThis policy can significantly bolster the actual income of workers, thereby improving their living standards and enhancing their motivation and enthusiasm for workFor businesses, such a measure also helps stabilize the workforce, ensuring smooth operations and contributing positively to the sector's overall growth.

A notable initiative targeting energy consumption offers a two-month discount of 50% on electricity bills for 97% of Indonesian households

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This will effectively reduce household electricity expenses, substantially easing financial pressures, particularly for low-income familiesIt also fosters greater efficiency in the use of electric resources while promoting responsible consumption of energy.

Regarding property and vehicle purchases, the government will continue implementing tax discount policies on home purchases and offer tax deductions for electric vehiclesThis continuation of property tax relief is intended to stimulate real estate market transactions and support steady development in the housing sector, benefiting associated industries such as construction and home furnishingAdditionally, tax breaks for electric vehicle purchases aim to promote greener alternatives, reducing reliance on traditional fuel-powered vehicles and advancing Indonesia's transition to a sustainable energy transportation system.

For low-income families, dedicated assistance programs signify the government's commitment to supporting vulnerable populations, addressing poverty issues, and reducing the wealth gap

These initiatives are crucial for upholding social equity and maintaining societal harmony.

Furthermore, small and medium-sized enterprises (SMEs) that report an annual revenue of less than 500 million Indonesian rupiah will be exempt from income tax, with an extended incentive policy of a 0.5% final income tax for individual SME taxpayers for another yearThese measures are expected to alleviate the tax burden on SMEs significantly, enhancing their financial sustainability, profitability, and resilience against economic shocksThis support plays a vital role in fostering SME growth, creating job opportunities, and invigorating entrepreneurial activity, which is essential for the optimization of Indonesia's economic structure and the long-term health of its economy.

The new incentive measures have garnered a positive reception from the Indonesian business community

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