The Finance Ministry is considering a reduction in the value-added tax (VAT) rate to boost household spending as tax revenue slows and economic activity shows signs of weakening.  

Finance Minister Purbaya Yudhi Sadewa said on Tuesday that any decision would depend on economic conditions and revenue performance by the end of the year.  

“We will see if we can lower the VAT to strengthen people’s purchasing power going forward. But we will study it carefully first,” he said. 

Indonesia’s VAT rate was scheduled to rise from 10% to 11% in 2022 and to 12% in 2025 under the Tax Regulation Harmonization Law. However, due to public resistance, the 12% rate now applies only to luxury goods, while most goods and services remain taxed at 11%. Although the official rate is 12%, the Directorate General of Taxes has kept an effective rate of 11% for most transactions. 

The government’s tax collection has continued to decline. As of September, only 62% of the annual target had been achieved, even after the target was revised downward by over IDR 100 trillion (USD 6 billion). Revenue fell 4.4% year-on-year, including a 9.4% drop in corporate income tax and a 13.2% decline in VAT and luxury tax receipts. Deputy Finance Minister Suahasil Nazara cited tax restitution as a factor behind the fall. Indonesia’s tax-to-GDP ratio fell to 10.08% in 2024 from 10.3% the previous year. 

Economists say a temporary VAT cut could stimulate household spending, which accounts for more than half of GDP. CELIOS executive director Bhima Yudhistira estimated that reducing VAT to 8% could even generate an additional IDR 1 trillion in revenue by spurring consumption and boosting income tax receipts. 

The government is also extending a VAT break for property purchases to support the middle class. The incentive, now set to run until the end of 2027, covers VAT on up to IDR 2 billion of a property’s price for homes worth up to IDR 5 billion (USD 300,000). Purbaya said the program would benefit buyers of about 40,000 units annually and support the property sector. 

By the end of September, total state revenue — including tax, non-tax, and customs receipts — reached IDR 1.8 quadrillion, while spending stood at IDR 2.2 quadrillion. The resulting fiscal deficit was IDR 371 trillion, or 1.56% of GDP. The government will review revenue performance before deciding on any VAT adjustments.