Following rise on luxury goods to 12% Finance Minister raises prospect of cut to main 11% rate
Indonesia’s government is exploring the possibility of a temporary reduction in value-added tax (VAT) to bolster consumer spending, just months after implementing a higher VAT rate on luxury supplies. The current standard VAT rate is 11%.
Finance Minister officials are reviewing the feasibility of lowering VAT to help households cope with economic headwinds to support household purchasing power going forward. But we must study it carefully first.
Watered down 2025 VAT rise
Indonesia’s VAT journey has been gradual but contentious. Under the Tax Regulation Harmonisation Law, the rate was set to climb from 10% to 11% in 2022, followed by a 12% increase scheduled for 2025. That timeline met with pushback from businesses and consumers concerned about rising living costs. To soften the impact, the government applied the 12% VAT selectively — targeting luxury goods — while keeping the 11% rate for most other goods and services.
Now, with early signs of slowing domestic demand, policymakers are weighing whether rolling back VAT, even temporarily, could give households breathing room and spur consumption.
Household consumption is the engine of Indonesia’s economy, accounting for over 50% of GDP. A VAT cut, even modest, could boost consumer confidence and encourage more spending in retail, dining, and services.
The Ministry of Finance plans to monitor tax revenue and economic performance through the end of the year before making a final decision.
