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The government will increase the rate of Value Added Tax (VAT) to 11 percent starting April 2022. Boost state revenue due to the tax ratio that continues to decline. Get ready to increase VAT next month (Illustration photo: Ari Saputra) Jakarta -

Although the Law on the Harmonization of Tax Regulations (UU HPP) has been enacted on October 29, 2021, several provisions in the Law have not all come into effect. Among them, namely the provisions regarding changes to the Value Added Tax Law (VAT) which will only take effect on April 1, 2022

One of the fundamental changes is the adjustment of the VAT rate from 10% to 11%. The 1% rate change was carried out as a policy step taken by the government to increase VAT revenues and provide a sense of justice for the consumption sector. People who have high consumption abilities can pay more taxes so that they contribute to economic equality.

In addition, for almost 3 decades applied in Indonesia, VAT only applies a single rate of 10%. In fact, if you look at other countries, this tariff is relatively low. The average global VAT rate ranges from 11-30%, such as the Philippines 12%, China 13%, Saudi Arabia 15%, Turkey 18%, Germany 19%, UK 20%, and Denmark 25%. So that the increase in the VAT rate to 11% is still considered moderate or reasonable among the average rates of other countries.

The increase in tariffs also catches up with the momentum of economic growth. As is known, the Indonesian economy in 2021 will grow by 3.69% from the previous year. Even in 2022, the government is optimistic that economic growth can reach 5.2%. So that the increase in VAT rates should be felt reasonable in the midst of an increasing economy.

In addition, an increase in the VAT rate can be one of the government's steps to restore the fiscal deficit back below 3% of GDP as mandated in the law. This deficit narrowing is of course in line with other fiscal policy measures such as increasing various state revenues, providing incentives, and sharpening spending allocations.
Removing Worry

Although it aims to create economic justice, it is normal for an increase in tax rates to experience resistance. When it began to be discussed in mid 2021, changes to the VAT provisions in the draft HPP Law experienced a warm discussion. One of the discussions that surfaced was the impact of tariff adjustments on price increases. The addition of a 1% VAT fee on goods or services is feared that some people will increase prices. In fact, as explained earlier, this tariff increase has been considered and taken into account by the government. Tariffs are adjusted to the prevalence of global average VAT rates and applied to the momentum of economic growth.

However, in order to maintain price stability and fairness, this VAT rate adjustment has been balanced with various supporting tax incentive policies. One of them is the provisions in the HPP Law which regulates basic necessities, health services, education services, social services, and several other types of services to receive exemption facilities and are not subject to VAT.

In addition, this year the government also provides incentives for Government-borne VAT (DTP) for the property sector. For a house sale of a maximum of Rp 2 billion, a 50 percent tax discount is given and a 25 percent discount on home sales with prices above Rp 2-5 billion. DTP incentives are also given to the Luxury Goods Sales Tax (PPnBM). Several LCGC cars that meet certain requirements are granted a PPnBM exemption.

This DTP tax incentive is given in order to ensure the productive consumption of the community. In terms of Income Tax (PPh), several supporting fiscal policies have been regulated. The HPP Law regulates the imposition of an income tax rate of 5% on net income, which is now set at 60 million from the previous 50 million. Taxpayers who have a net income of up to 60 million can still enjoy a rate of only 5%. Another thing, the HPP Law has also regulated MSMEs with a turnover of up to Rp 500 million to be free from the imposition of PPh.

So that MSMEs can maintain their economic capacity and develop. Therefore, the impact of adjusting the VAT rate on price increases is not too significant. Because it has been balanced with various other fiscal incentive policies, it is appropriate to implement the VAT rate adjustment in April 2022.
Challenge

However, the implementation of the VAT rate adjustment in April will not be without challenges. As is known, April this year coincides with the month of Ramadan. Usually, as in previous years, there is an increase in prices due to shopping activities during Ramadan and Eid celebrations.

Another thing that can increase prices in April is the condition of the Covid-19 pandemic. As of March, the pandemic has shown no sign of abating. Restrictions on economic activity due to the ongoing pandemic can also push prices up.

Furthermore, globally there are tensions in eastern Europe. The conflict between Russia and Ukraine could result in soaring global crude oil and natural gas prices. The increase in the price of these two commodities often triggers an increase in the price of other goods and services.

Therefore, later in April, it is predicted that the price increase could be a necessity. So the government needs to mitigate the risk of price increases that will occur, especially in relation to the adjustment of VAT rates. First, the government needs to control prices so they don't rise too high. Supply chain improvements can be a solution.

From the upstream sector, the government ensures the availability of raw materials and production performance runs smoothly. In the distribution sector, the government ensures that the distribution of goods is not hampered. Meanwhile, in the downstream sector, the government monitors the availability of goods on the market, such as ensuring that there are no shortages due to hoarding of goods that causes significant price increases.

Setting the highest selling price for primary needs can also be an option. Second, the government must protect vulnerable groups from the impact of price increases, such as providing social assistance and subsidies. Later, the social assistance and subsidy program funds can be financed, one of which is by adjusting the VAT rate. This is also in line with the aim of adjusting the VAT rate, namely economic equity, especially the protection of the vulnerable. Third, the government needs to communicate the issue of price increases not being caused by VAT, but other factors that have been mentioned above.

So that the issue of price increases is not used as an argument for rejecting the VAT rate adjustment policy. This is because basically the VAT rate adjustment is not correlated with the price increase as explained at the beginning of the article. Meanwhile, the adjustment of the VAT rate is a shared need. The state needs sufficient funds to create economic equity and social justice.