Indonesia plans to increase its value-added tax rate to 12%, from 10%, and begin imposing the levy on some essential goods and services as part of a wider tax overhaul.

The 12% VAT will be a general tariff covering most goods and services, Finance Minister Sri Mulyani Indrawati said on Monday as parliament began deliberating the government proposal. The VAT will also be broadened beyond the current single-tariff structure so certain items can carry 5% to 25% rate, for example depending on the price of the products.

“The tax base should be expanded and tax compliance should be improved to increase fiscal capacity,” Indrawati said. “We need to continue to reform tax policy and administration so that it is fair between sectors and between income groups, and creates legal certainty, becomes an optimal source of state revenue, and follows best practice.”

Previously exempted essentials, like basic goods as well as education and health services, will be subject to VAT under the proposal, though at lower rates. Those who can’t afford the VAT may be exempted or be eligible for subsidies.

Some VAT exemptions will remain, including:

  • Goods and services that are already subject to local taxes and levies
  • Money and gold bullion for the country’s foreign exchange reserves and securities
  • General government services that can’t be provided by other parties
  • Religious services
  • Facilities supporting exports and down-streaming of natural resources

Source: Bloomberg


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