Comprehensive VAT reform – Editorial

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Editorial Board (The Jakarta Post)

Jakarta ●
Mon 11 October 2021

2021-10-11
01:20
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2585ce4f3192e686844ec057dc14b511
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Editorial
law, reform, VAT, rate, negative-list, health, public service, human resources, tax office, Taxpayer
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The value-added tax (VAT) system reform measures stipulated in the Harmonized Tax Regulation Act that was approved by the House of Representatives on Thursday are the most comprehensive and bold, increasing VAT objects to expand the ‘tax base and introducing multiple rates to improve equality and increase VAT rates.

Indonesia’s VAT system has long been criticized by domestic and international tax analysts as being too narrow because it grants too many exemptions and incentives and imposes too high a registration threshold for businesses subject to VAT. In addition, it only imposes a single rate of 10%, which makes it quite regressive.

The new law will raise the standard VAT rate from 10% today to 11% next April and 12% in 2025. But the legislation also allows the government to determine single and final VAT rates for certain goods and services and certain sectors of the economy. Separating goods and services based on who consumes them with multiple rates will help the government gradually tax consumers. Therefore, the multiple VAT rates will consist of standard and reduced rates depending on the consumers of the goods and services.

The new law will increase VAT objects by strictly limiting the negative list, or exemptions, to basic necessities widely used by the majority of people and public services such as health, education, financial and social services.

Certainly, combining multiple rates and increasing VAT objects will increase both compliance and administration costs, as taxpayers would have to separate and categorize their products based on the product’s VAT rates. The General Tax Directorate (DGT) should therefore have sufficient and competent human resources to ensure that the categorization carried out by taxpayers corresponds to the VAT rules in force.

As with most laws, the devil is in the technical details. The next challenge is how the government will determine the registration threshold for companies subject to VAT collection, because under the VAT system, taxable companies are required to pay VAT on inputs but also have the right to pay VAT on inputs. right to credit the input VAT of the output VAT they collect.

But the mandate that the law gives to the government to determine single and definitive VAT rates for certain goods and services and for certain sectors of activity would go a long way in selecting the small and medium-sized enterprises (SMEs) that will be obliged to collect VAT. The final rates set for certain goods and services will also relieve producers, especially SMEs, of the administrative burden of calculating and collecting VAT.

It is imperative that DGT prepares its human resources and taxpayers to understand the technical details of calculating and collecting VAT in the new system, as VAT revenues typically represent more than 45% of total tax revenues.

The increase in tax revenue is all the more crucial as the government is required by law to reduce the budget deficit, which is estimated from 5% in 2022 to less than 3% in 2023, a decrease of 2 percentage points .

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