VAT and Purchasing Power

KOMPAS/PRIYOMBODO

A man looks at footwear products at one of the outlets in a shopping center in the Kebayoran Lama area, South Jakarta, Monday (4/4/2022). As of April 1, 2022, the government has increased the rate of Value Added Tax or VAT from 10 percent to 11 percent.

Starting April 1, valued added tax (VAT) of 11 percent, increased from 10 percent previously, came into effect. It is feared that the higher VAT could potentially add to the people’s burden.

By definition, VAT is consumption tax that is levied on goods and services at each stage of the supply chain where value is added, from production to their distribution to consumers. Consumers pay the tax, except on goods and services that are exempt from VAT.

The state uses the taxes it collects from business entities and individuals as revenue to finance development. For more than two years, we have been experiencing difficulties due to the Covid-19 pandemic. During the peak of the pandemic, the economy suffered sharp contraction that led to a recession. We are aware that there is a need to increase tax revenues to finance development, especially since the government must reduce the state budget deficit to 3 percent or lower by 2023.

Also read:

> Rate Increased, Incentives Provided

> Tax Reform with Justice

However, there is a question among the public whether now is the right time for the government to increase VAT. Although the tax has been increased just 1 percentage point, consumers, as buyers of the final product, will be paying more than 1 percent, because each stage of the supply chain that generates added value is subject to VAT. A bottle of soy sauce, for example, has at least four stages in the production process that generate added value, namely the bottle, bottle cap, label, and soy sauce.

Prices had begun to increase before the new VAT rate came into effect.

On the other hand, the government has been trying to boost consumption in order to spur the economy, which had slumped as an impact of the pandemic. However, the VAT rate hike could instead reduce consumption, especially among people in the lower middle income group. There are concerns that the gap in welfare will widen even more.

BPMI SEKRETARIAT PRESIDEN

Minister of Finance Sri Mulyani Indrawati

Finance Minister Sri Mulyani Indrawati said the impact of the VAT hike on inflation had been taken into account and that inflation was under control. A number of basic necessities are exempt from VAT, such as rice, corn, meat, eggs, and gold, while health and education services are also exempt from VAT.

The government has also issued tax incentives for lower middle income households in the form of a tax reduction, a tax exemption for micro, small and medium enterprises (MSMEs) with a turnover of less than Rp 500 million (US$35,000), and VAT rates of 1 percent, 2 percent, and 3 percent for certain types of goods and services.

Also read:

> Optimizing Value Added Tax

> MSMEs People's Buying Power should be Maintained

When every consumer, regardless of age, gender, or occupation, is obliged to pay VAT, it is natural for all taxpayers to demand that the government properly use the revenues it gains from tax. For example, the tax revenue should not be abused and instead, it should be used for the greatest benefit of the people.

Revenues from tax are also needed to reduce the income gap, prevent stunting and improve the quality of health and education services, as well as to provide decent jobs and social assistance that is appropriate and productive. Thus, the principles of economic justice can be fulfilled.

This article was translated by Hendarsyah Tarmizi.