Indonesia is considering tiered VAT rates, with different rates for different classes of product. Indonesian authorities are looking to increase revenues amid an economic downturn. Under the proposed system, luxury items would be subject to a higher rate of VAT.
The government has also mooted simply raising the overall VAT rate
A fiscal balancing act
Indonesian Finance Minister Sri Mulyani says a VAT hike would increase revenue. Indonesia remains in a recession, although conditions have recently eased.
However, representatives of Indonesian business have expressed concern with the proposed VAT increase. Some commentators say the potential deleterious effects on consumer spending could affect the pace of the country’s economic recovery.
VAT rates as economic policy
The role of VAT as a fiscal policy tool is, of course, very complex. For instance, in the face of a downturn in the tourism sector Botswana recently raised its VAT rate for the first time in a decade. The move is part of broader measures aimed at driving sustainable growth.
By contrast, many policymakers have explored cutting VAT rates in a downturn. The logic in such cases is clear: temporarily cutting VAT rates is quick and easy to perform, and produces efficient increases in demand.
Policymakers also deploy more targeted VAT incentives. For example, Portugal is deploying a system of VAT credits that specifically are to be used in the tourism sector.
If Indonesia proceeds with the tiered VAT rates system, it will be interesting to note the effect on demand and revenue generation.
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