"Buy now. The price goes up on Monday." This marketing line may make a strong impression on the mind of Indonesian consumers after being popularized by one of the national property developers. We’ll hear this marketing campaign a lot during a transition between the Value Added Tax (VAT) object expansion and the rate increase in the second quarter of 2022.
As we know, the government and the House of Representatives have once again reconstructed tax rules by issuing the Harmonized Tax Law (HPP Law). The important points of the tax amendment related to this recent change are, among others, the addition of types of goods and services subject to VAT and the increase in the VAT rate from 10% to 11% starting from April 2022 and to 12% before 1 January 2025 at the latest. The VAT rate can be adjusted to the lowest of 5% and the highest of 15%.
Related to this rate increase, as the law emphasizes the threshold using "the lowest/the highest...", the government may accelerate the increase in VAT rate into 12% or even 15% before 2025. Even the VAT rate is possible to rise twice next year.
Still, there is a room for a reduction in the VAT rate (to as low as 5%), but with the least possibility.
One thing is for sure, the object expansion and the increase in the VAT rate are not popular policies the public expect as increases in prices of goods and services will follow. The pandemic and current crisis even make it worse. These policies can be a kind of disincentive for the public who have just been hit by a recession.
However, some people may see it differently, instead of lamenting it. This is especially for business actors who see the momentum for marketing campaigns before some objects are eventually subject to VAT or the rate rises. At least there is still time until the end of March 2022 for them to boost the sales by selling out their products.
This phenomenon will certainly have a significant effect on the adjustment of product prices, including goods for the people's primary needs (clothing, food, and housing as well as vehicles).
From the perspective of entrepreneurs, not only sales, but purchases can also surge at the end of this year until the beginning of next year. Not only consumers can be "tempted" by the announcement, "VAT and prices will rise," business actors or producers can also think the same way by advancing the timing of the procurement of raw materials, capital goods, or operational goods. This is at least to reduce the costs that will soar starting from April 2022.
In the HPP Law, a new clause is also added related to the VAT collection by VAT-Registered Persons of certain business sectors, which can apply to a final VAT rate with a certain amount. Although the specific rate is not stated, the Ministry of Finance has given an example of a range of 1%; 2%; or 3% of revenue. In the end, all will depend on the needs of the State Budget and the policy of the Minister of Finance to determine it.
However, when the two rate schemes (normal and final) prevail, the VAT multi-rates will apply starting from next year. The problem is how to implement and monitor it.
On several occasions, the government has acknowledged that the C-Efficiency of Indonesia's VAT is only 63.58%. This means that Indonesia has only been able to collect 63.58% of the total VAT that should have been collected.
If the expansion of the VAT object is believed to increase tax revenue, will the rise of the VAT rate also increase the effectiveness of its collection? Let's look at one example from a neighboring country, the Philippines that applies a rate of 12%, the efficiency of the VAT collection is still much lower than Indonesia’s.
The problem is not about the low rates, but the administration process of the collection and the supervision that must be further refined.
With the digital boom, we all know that the optimization and effectiveness of any activity will depend heavily on the mastery of information and technology. This point should get more serious attention from the government to improve the bureaucracy, especially related to the development of an electronic tax administration system that is capable of adapting to the development of digital technology.
**) A short version of the article was published in Kompas.com, on 27 October 2021.