Indonesia May Revive Tax Amnesty Amid Pressure to Delay VAT

Indonesia will discuss reviving its tax amnesty program next year as President Prabowo Subianto’s government seeks ways to boost state revenue amid growing public pushback over a planned value-added tax hike.

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Bloomberg News

Grace Sihombing and Chandra Asmara

Published Nov 19, 2024  •  2 minute read

Vehicles in traffic next to the Mass Rapid Transit (MRT) construction site in Jakarta, Indonesia, on Wednesday, Sept. 18, 2024. Indonesia's central bank is approaching the point where it can start easing borrowing costs as the rupiah keeps strengthening and inflation stays modest. Most economists aren't convinced that it will happen this week though, before the expected US rate cut. Photographer: Rosa Panggabean/Bloomberg Photo by Rosa Panggabean /Bloomberg

(Bloomberg) — Indonesia will discuss reviving its tax amnesty program next year as President Prabowo Subianto’s government seeks ways to boost state revenue amid growing public pushback over a planned value-added tax hike. 

The newly-appointed parliament decided to add a Tax Amnesty Law revision to its list of priority bills for 2025, following a plenary session in Jakarta on Tuesday. The last amnesty ended in 2022, and any revised law could take effect as soon as next year, according to the chairman of parliament’s finance commission Mukhamad Misbakhun.

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Lawmakers are looking at the third tax amnesty program in a decade amid protests from lawmakers and the public over plans to hike VAT next year. That rise, from 11% to 12%, has already been enacted into law.

But higher taxes on goods and services “could further erode domestic buying power which in turn can slow down economic growth,” Deputy Speaker of the House of Representatives Cucun Ahmad Syamsurijal said in a statement on Tuesday. The timing would also be unfavorable because of geopolitical tensions, and the potential for energy and food crises that could drive up inflation in 2025, Syamsurijal added. 

Members of the public have also expressed anger online, with some calling on people to refrain from spending and practice frugal living to protest the planned tax hike. Some business groups have also called for a delay, fearing the rise will further hurt sales and businesses.

Read: Indonesia VAT Hike in Doubt as Lawmakers Show Emerging Rifts

The government is faced with a tough task of balancing both its economic and fiscal health next year. Weaker global growth and commodity prices risk reducing tax receipts at a time when the government is also preparing massive spending plans, threatening to breach the budget deficit target of 2.5% of gross domestic product for 2025.

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On the other hand, domestic consumption — which accounts for more than half of the nation’s GDP — has struggled to grow above 5%, holding back the nation’s economic expansion, which decelerated to its slowest pace in a year last quarter. Rampant layoffs in the labor-intensive manufacturing sector also threaten the outlook for domestic spending.

A tax amnesty could help build a tax base, Misbakhun said, noting there will be technical discussions with the government on the matter. 

If revived, the tax amnesty will be Indonesia’s third such program after 2016 and 2022. In the last round, the government collected 61 trillion rupiah ($3.9 billion) in revenue, less than half of what was collected in the first round, with many observers having warned that a second amnesty risked reducing tax compliance.

—With assistance from Norman Harsono.

(Updates throughout with protests on VAT hike plan.)

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