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The public has recently been buzzing about the increase in the Value Added Tax (VAT) rate from 11% to 12%, effective January 1, 2025.
Such an increase sparked pros and cons reactions from various groups of people. The government has clarified that the increase complies with Law Number 7 of 2021 concerning the Harmonization of Tax Regulations (UU HPP).
It started with the policy of the then President, Joko Widodo, who sent a letter to the DPR on May 5, 2021, when discussing the HPP Bill (then called the RUU KUP).
The DPR then formed a working committee on June 28, 2021, and the bill was approved at Level I on September 29, 2021. On October 29, 2021, Jokowi enacted the HPP Law, which outlines a gradual VAT increase (11% on April 1, 2022, and 12% on January 1, 2025).
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Jokowi is confident that the HPP Law will enhance sustainable economic growth and accelerate economic recovery. To achieve this, a fiscal consolidation strategy aimed at improving the budget deficit and raising the tax ratio is required.
Towards the close of 2024, President Prabowo and Minister of Finance, Sri Mulyani, made a surprising announcement to end the controversy surrounding the 12% increase. They officially declared that the 12% VAT rate applies only to luxury goods.
The types of goods subject to the tax are listed in Article 2, paragraph (3) under the Regulation of the Minister of Finance (PMK) Number 131 of 2024, which stipulates that the 12% VAT rate is applicable to motor vehicles and non-motor vehicle goods that have been classified as objects of Sales Tax on Luxury Goods (PPnBM).
The category of luxury goods subject to PPnBM is regulated in Government Regulation Number 61 of 2020. Two categories of luxury goods are subject to PPnBM: motor vehicles and non-motor vehicle goods.
The imposition of PPnBM on motor vehicles is regulated in the Regulation of the PMK Number 141/PMK.010/2021, which was last amended and replaced by PMK Number 42/PMK.010/2022.
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Meanwhile, non-motor vehicle goods are regulated in PMK Number 96/PMK.03/2021, which was last amended by PMK Number 15/PMK.03/2023.
There are at least five categories of non-motor vehicle goods that are subject to PpnBM, as follows:
Luxury residences such as upscale homes, apartments, condominiums, townhouses, and similar properties
Aircraft, except for state purposes or commercial air transport
Hot air balloons
Firearm ammunition and other firearms, except for state purposes
Luxury yachts, except for state interests, public transportation, or tourism businesses
Following the official announcement by Prabowo and Sri Mulyani on the evening of December 31, 2024, several key points emerged concerning the 12% VAT issue, which had been the subject of debate. These include:
VAT Rate Increase Only for Luxury Goods: The VAT rate increase to 12% is not universally applicable to all goods. This increase primarily targets items categorized as luxury goods.
Definition of Luxury Goods: Luxurious goods as referred to in the laws and regulations, namely:
Regulation of Minister of Finance Number 15/PMK.03/2023: It regulates the types of Taxable Goods (BKP) other than motor vehicles subject to PPnBM. Examples include luxury residences, luxury yachts, and aircraft (except for commercial transport and state purposes).
Regulation of Minister of Finance Number 141/PMK.010/2021: It regulates the types of motor vehicles subject to PPnBM (also considered as luxury goods).
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Non-Luxury Goods Not Directly Affected by Rate Augmentation: Even though the 12% VAT rate is officially implemented, products and services not classified as luxury goods do not encounter a direct increase due to adjustments in the Tax Base (DPP).
Mechanism for VAT Calculation Starting 2025:
Luxury Goods (with PPnBM): VAT is calculated at 12% multiplied by the selling price or import value (12% x selling price/import value).
Non-Luxury Goods and Services: VAT is calculated using a DPP based on 11/12 of the selling price, import value, or replacement value. This is then multiplied by the 12% VAT rate (12% x 11/12 x selling price/import value/replacement value). This mechanism ensures that the VAT paid by the public for non-luxury goods remains consistent even with the VAT rate increase to 12%.
Exceptions to the 11/12 Formula: The 11/12 DPP formula for other values does not apply to:
Taxable Entrepreneurs (PKP) employ the DPP in the form of other values as stipulated in separate tax laws and regulations.
PKP utilizing the DPP in a specific amount. For these exceptions, the collection, calculation, and remittance of VAT are conducted as per the provisions of applicable laws and regulations.
In essence, the government leverages the DPP adjustment mechanism to safeguard the public from the direct impact of the VAT rate increase on daily necessities.
The pros and cons surrounding the 12% VAT increase ended with the issuance of Regulation of the Minister of Finance Number 131 of 2024, which was established and enacted on December 31, 2024 (PMK 131/2024).
Amidst the escalating controversy, the government ultimately sought a compromise, “adjusting the formula”, ensuring its implementation while mitigating the burden on the lower middle classes.
Now you’ve learned enough about the buzz surrounding the 12% VAT issue only from this short article. Find out more articles related to business, particularly the transportation and logistics sectors, on the SERA website’s blog page.
PT Serasi Autoraya (SERA) is part of the Astra Group, which has been in the business for the last 34 years. SERA has three main business units: TRAC as the vehicle rental services for company and personal needs, SELOG which offers logistics services, and the IBID auction platform.