News about the increase in Value Added Tax (VAT) from 11% to 12% has sparked widespread discussion—not only among the general public, but also regarding the long-term impact it may have on business owners and MSMEs. So, what exactly is VAT, and what are the potential effects of this increase? Find out more here!
A Brief Overview of Value Added Tax (VAT)
Quoting the Directorate General of Taxes, Value Added Tax (VAT) is a levy imposed on individuals, businesses, and government entities registered as Taxable Entrepreneurs (Pengusaha Kena Pajak/PKP) for transactions involving the sale and purchase of Taxable Goods (Barang Kena Pajak/BKP) and/or Taxable Services (Jasa Kena Pajak/JKP).
In English, PPN is known as Value Added Tax (VAT) or Goods and Services Tax (GST).
The amount of added value imposed on taxable goods or services is derived from the accumulation of costs and profits throughout the production and distribution process.
Although the subject of VAT (the party responsible for collecting it) is a Taxable Entrepreneur (PKP) or non-PKP, in practice, VAT is ultimately borne by the final consumer who purchases taxable goods and/or services. For this reason, VAT is often referred to as an indirect tax.
This is because, as the tax bearer, consumers do not remit the tax directly to the government; instead, it is collected and reported by the merchant or business operator.
Like other taxes, VAT aims to increase state revenue and fund government programs such as infrastructure development, education, healthcare, and other public services.
Planned VAT Increase to 12 Percent
The legal basis for VAT in Indonesia is Law Number 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods.
Since its enactment, this law has undergone two amendments.
Initially, the VAT rate was 10 percent. Subsequently, following the enactment of Law Number 7 of 2021 on the Harmonization of Tax Regulations, the VAT rate increased to 11 percent on April 1, 2022, and later rose to 12 percent on January 1, 2025.
However, this VAT rate increase applies only to luxury goods and services that are already subject to the Sales Tax on Luxury Goods (PPnBM), and does not affect goods and services considered basic necessities for the public.
Goods and Services Subject to 12 Percent VAT
The Ministry of Finance stated that this increase aims to raise the economic sector’s contribution without burdening the general public. For this reason, the 12 percent VAT applies only to luxury goods and services.
Luxury goods and/or services are defined as those that are not basic necessities, are owned only by segments of the population with high purchasing power, and are priced significantly higher than similar goods with standard specifications.
To make it easier to understand, the following is a list of taxable goods and services subject to 12 percent VAT:
1. Premium Electronics
- Televisions larger than 75 inches or equipped with advanced technologies, such as OLED (Organic Light Emitting Diode).
- Multi-door refrigerators with large capacity and advanced features.
- Smart electronic devices, such as robotic vacuum cleaners and similar gadgets.
2. Luxury Vehicles
- Cars with a selling price above 2 billion Rupiah, such as sports cars, supercars, and high-spec electric vehicles.
- Motorcycles with an engine capacity exceeding 500 cc.
3. Luxury Properties
- Luxury properties, such as houses, apartments, villas, and townhouses with a minimum value of 30 billion Rupiah.
4. Luxury Jewelry
- This includes gold, diamonds, or other gemstones that are specially designed.
5. Premium Imported Goods
- Internationally branded goods, such as luxury handbags.
6. Exclusive Services
- Educational facilities such as international schools, as well as memberships for exclusive clubs, like golf clubs.
- High-end recreational facilities, such as golf clubs, yacht clubs, and ownership of private yachts or jets.
Impact of the 12 Percent VAT Increase on SMEs
The VAT increase affects not only consumers but also business owners—particularly SMEs. The following are the anticipated impacts that could influence SME performance.
1. Increase in Selling Prices
The VAT increase can lead to higher prices for various basic materials. This significantly affects SMEs, as the cost of raw materials they use may rise sharply.
To cope with this, SMEs may need to raise the selling prices of their products or services, which could reduce consumer purchasing power—especially for price-sensitive products or services.
2. Decrease in Demand
When the prices of basic materials increase, the cost of various other goods may also rise. This causes consumers to become more selective in their purchasing decisions.
As a result, demand may decrease, and consumers might switch to more affordable alternatives.
3. Reduction in Profit Margins
The soaring cost of raw materials due to the VAT increase can shift pricing benchmarks. This may cause SMEs to reconsider raising their prices, even though production costs have already risen by a certain percentage.
The dilemma is that raising prices risks losing customers, while not increasing them leads to thinner profit margins.
4. Additional Administrative Burden
The VAT increase requires SMEs to record transactions more carefully and report taxes regularly. This can become an additional burden, especially for small businesses that lack organized accounting systems, and they may face fines for errors or late submissions.
To ease this burden, SMEs can use user-friendly tax or accounting applications, such as Labamu. Additionally, they can take advantage of government tax training and the 1 percent final VAT rate incentive to remain compliant without excessively straining their operations.
5. Competition with Large Enterprises
In fact, the VAT increase affects both SMEs and large businesses. However, compared to bigger enterprises, SMEs may experience a heavier impact.
Large businesses generally have more efficient operations, making it easier for them to absorb price increases. In contrast, even a small rise in raw material costs can significantly impact an SME’s overall operations, making it harder for them to compete with established enterprises.
6. Slowing Down or Halting Business Expansion
The increase in production costs resulting from the VAT hike may lead SMEs to slow down or even halt their business expansion plans.
If this occurs on a large scale, it could have a significant impact on the national economy.
7. Potential Business Closures
A sustained decline in consumer purchasing power can affect the stability and profitability of SMEs.
Several economic experts have even warned that the VAT increase could have long-lasting effects on SMEs, making it difficult for them to survive and potentially leading to bankruptcy.
Mitigation Steps to Cope with the VAT Increase
To reduce the negative impact of the VAT increase on SMEs, there are several mitigation steps that business owners can adopt. The following measures can be considered:
- Operational Efficiency Reducing production costs to maintain profit margins despite rising prices.
- Careful Pricing Strategy Maintaining consumer purchasing power while accommodating the VAT increase.
- Enhancing Product Value: Making products more attractive so that consumers remain willing to pay despite price increases.
- Leveraging Digital Technology: Reducing marketing costs and reaching a larger consumer base.
- Utilizing Government Incentives and Support Reducing tax burdens and accessing government support to ensure business sustainability.
So, that’s the information regarding the 12 percent VAT and its impact on SMEs. By being aware of these potential effects, make sure to use Labamu to document all your business transactions and administrative records. Simply download the app from Google Play or the App Store. and enjoy the convenience it offers.
