Impact of PPN Hike to 12% on Indonesia's Economy

The government of Indonesia has announced plans to increase the Value-Added Tax (PPN) from 11% to 12% starting in 2025, a move that has sparked concern across several industries. While this change is aimed at boosting national revenue, the implications for businesses, particularly in manufacturing and consumer sectors, are expected to be significant. This article explores the potential challenges and outcomes of this policy shift and why industries are worried about its impact.

The new PPN increase is part of the government's broader tax reforms under the Harmonization of Tax Regulations Law (UU HPP), and it is expected to generate an additional Rp73.76 trillion in tax revenue. Despite these projections, the rise in the PPN rate is likely to exacerbate challenges for many businesses, particularly in sectors reliant on imported goods and production materials. Industries like machinery and capital goods will likely see an increase in production costs as the higher tax is applied to raw materials and equipment.

In addition to raising production costs, businesses fear that the increase in PPN could lead to higher prices for consumers. This, in turn, could reduce purchasing power, particularly among middle- and low-income households. As a result, these consumers may cut back on spending, which could negatively impact demand for goods and services, further hurting businesses. Small- and medium-sized enterprises (SMEs) are particularly vulnerable, as they may struggle to absorb the additional tax burden.

The effects are also compounded by the fact that some sectors, such as food and beverage and healthcare, are exempt from the PPN hike. While this exemption is designed to mitigate the impact on essential goods and services, experts argue that it may create an imbalance in the market. Industries that depend on machinery and raw materials—such as the food and beverage sector—may still experience higher costs for production, which could make their products more expensive despite the exemption.

The situation also raises concerns about Indonesia’s competitiveness in the Southeast Asian region. Countries like Thailand, which recently lowered its PPN rate from 10% to 7%, could become more attractive for investment and trade, particularly for businesses that rely on cross-border supply chains. The differing tax rates within ASEAN countries might incentivize companies to import goods from these lower-tax nations, further straining domestic industries.

In light of these concerns, industry leaders are calling on the government to reassess the impact of this policy on economic growth and the competitiveness of local industries. They suggest that the government should explore broader fiscal reforms that can boost tax revenue without overburdening businesses and consumers. Expanding the tax base and improving tax collection efficiency could offer sustainable solutions for raising revenue without triggering negative side effects in the economy.

As the new PPN policy is set to take effect in 2025, businesses and consumers alike are bracing for its potential impact on the economy. While the tax increase may help strengthen the country’s finances, careful consideration is needed to ensure that it does not stifle economic growth, worsen income inequality, or harm the purchasing power of households. In the coming months, we can expect to see more debates on the necessity and fairness of this tax hike as stakeholders from various sectors voice their concerns.