Counter Attack from VAT Increase

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

The government plans to increase the Value Added Tax (VAT) rate in 2022. The planned increase in the VAT rate is intended to increase state revenues to finance economic recovery after the Covid-19 pandemic. Moreover, the realization of tax revenues contracted by 19.7 percent in 2020, only reaching Rp 1.07 quadrillion (US$74.90 billion)

Meanwhile, the government is unlikely to further widen the state budget deficit by increasing debt. The reason is that the 2020 budget deficit had already reached 6.09 percent or Rp 956.3 trillion with an additional debt of Rp 1.22 quadrillion. Likewise, the 2021 budget deficit is estimated at 5.7 percent or Rp 1 quadrillion, with an additional debt of Rp 1.17 quadrillion. As a result, the government\'s debt as of April 2021 has reached Rp 6.52 quadrillion or 41.18 percent of gross domestic product (GDP).

Therefore, the government plans to limit the 2022 state budget deficit in the range of 4.51-4.85 percent. Consequently, it must be able to increase state revenues. But, the government has justified that the Value Added Tax (VAT) rate at 10 percent, while the average VAT rate in Asia is 12 percent and 16 percent in the world.

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In fact, the system and concept of the implementation of VAT is vary among countries in the world. Some countries impose VAT only on the final products or sales tax. Of course it should also be followed by good administration with an efficient supply chain and distribution system.

Meanwhile, VAT in Indonesia is based on the addition of value in each production value chain and distribution chain. As a result, even though the VAT rate is only 10 percent, it is imposed in each step of production and value chains so that consumers or buyers pay much more.

According to calculations, a VAT increase has the opportunity to increase state revenue. However, this increase will not necessarily bring a positive impact on economic growth. The proof is that the contribution of government spending to GDP during 2020 was only 9.29 percent. Its share to the economic growth was also only 0.15 percent although the government had doubled the spending by widening the deficit to more than 6 percent. However, the unrealized spending in the 2020 state budget reached Rp 234.7 trillion.

Moreover, if the increase in government spending is not effective as a fiscal stimulus, it will increase the burden on business actors. It\'s like the Javanese proverb ”mburu uceng, tapi kelangan deleg” (chasing small fish, but losing big fish), which has become the main determining factor of the economic growth .

Reverse condition

The government has said it will introduce a multi-tariff VAT policy, namely imposing different VAT rates on different types of goods. For example, the VAT rate on luxury goods consumed by the rich is subject to higher VAT. Meanwhile, for basic necessities, the VAT is lower. However, there are a number of problems that make the multi-tariff VAT plan unrealistic and difficult to be implemented.

First, the largest contribution to household expenditure comes from the upper middle class. Second, so far the main contributor to VAT receipts comes from the spending of the middle class, which accounts for 43 percent. Third, the increase in cheap imported products. The cheap imported products have become predators of the local products. It also make consumers fall in love with imported products even more due their low prices. The imported products are getting cheaper because various imported products are free of import duty or free of VAT as part of multilateral trade agreements. Of course, if VAT is increased, it will accelerate the extinction of domestic products from the market.

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Fourth, it will hamper the re-industrialization program. Various programs for the development of import substitution industries such as in downstream industries and in labor-intensive industries have been widely disrupted. The increase in VAT will certainly make various imported substitute products unattractive. As the consequence, it will make investments in the downstream and labor-intensive industrial sectors are economically unattractive. If it is the case, the VAT increase will not be able to compensate for the potential loss of tax revenue caused by deindustrialization. As a result, state revenues have the potential to decline.

Fifth, it will reduce the people\'s purchasing power. The increase in VAT will certainly add the people’s spending. Various increases in production costs will result in the increase in product prices. In the midst of the decline in the people\'s purchasing power, the increase in product prices can hamper the recovery in the household spending.

Sixth, an increase in tax rates has the potential to reduce taxpayer compliance. Various cases of moral hazard in taxation occur because many taxpayers try to avoid tax payment by colluding with tax officials. The impact will be severer, if the government will also introduce another tax amnesty policy, which is currently under study. Of course, it will lead to the decline in the people’s discipline in paying taxes.

Wise measure

The reduction of the state budget deficit does not always mean there will be an increase in state revenues, especially when the business world is still recovering from the impact of the pandemic. Instead, it should prioritize efforts to optimize the budget through budget efficiency and effectiveness. The main focus should be to increase budget allocations for productive activities so that they have a positive impact on real sectors that create jobs.

In addition, as a country which is rich in natural resources (SDA), the efforts to increase the state revenue should not only depend on taxes. Unfortunately, non-tax revenues, especially from natural resources, have begun to decline. Hundreds of state-owned enterprises should also be able to contribute part of their profits. Moreover, through the national economic recovery program, the government has disbursed up to Rp 121.73 trillion.

ENNY SRI HARTATI, Senior Researcher at the Institute for Development of Economics and Finance (Indef)

This article was translated by Hendarsyah Tarmizi.