Impact of Indonesia’s VAT Increase to 12%: Economic Burden on Low-Income Workers and Unions’ Response
The Confederation of Indonesian Trade Unions (KSPI) opposes the government’s plan to raise Value Added Tax (VAT) to 12 percent by 2025. They argue that this increase will heavily affect low-income workers and hinder the country’s economic growth target of eight percent.
KSPI President Said Iqbal stated that higher VAT will lead to increased prices for goods and services. The expected increase in the minimum wage, which is likely to be only one to three percent, will not be sufficient to meet basic needs. A decline in purchasing power will hurt various economic sectors and may lead to job losses.
Iqbal emphasized that the VAT hike would widen the gap between the rich and the poor. Low-income individuals will pay more taxes without a significant increase in their income, worsening social inequality.
KSPI demands an increase in the minimum wage by eight to ten percent in 2025 to boost purchasing power. They recommend adjusting sectoral minimum wages to reflect the needs of different industries.
Interview with Said Iqbal, President of the Confederation of Indonesian Trade Unions (KSPI)
Interviewer: Thank you for joining us, Mr. Iqbal. The Confederation of Indonesian Trade Unions has voiced strong opposition to the government’s planned increase of Value Added Tax (VAT) to 12 percent by 2025. Can you explain why this move is particularly concerning for low-income workers in Indonesia?
Said Iqbal: Thank you for having me. Our opposition to the VAT hike is grounded in the reality that this increase will disproportionately impact low-income workers. Higher VAT will inevitably lead to increased prices for essential goods and services. With the already challenging cost of living, this additional burden will severely threaten the purchasing power of those who can least afford it.
Interviewer: What do you see as the potential consequences of this tax increase on the broader economy?
Said Iqbal: We foresee a decline in purchasing power among workers, which will hurt various economic sectors reliant on consumer spending. A reduction in demand could lead to business cutbacks and, ultimately, job losses. Moreover, the government has set an ambitious economic growth target of eight percent; however, imposing a higher VAT complicates achieving this goal.
Interviewer: You mentioned the expected increase in the minimum wage being insufficient. Can you elaborate on this?
Said Iqbal: Yes, we estimate that the increase in the minimum wage may only be between one to three percent, which won’t be nearly enough to keep up with inflation and basic needs. Workers stand to suffer as the VAT increase erodes their already limited income, leaving them in a precarious financial situation.
Interviewer: How do you perceive the impact of this VAT hike on social inequality?
Said Iqbal: The VAT increase would exacerbate the wealth gap in Indonesia. Low-income individuals, who already struggle to make ends meet, will be subjected to higher taxes without any meaningful increase in their income. This will inevitably worsen social inequality and hinder efforts to create a more equitable society.
Interviewer: What is KSPI’s proposal to counteract the negative effects of the VAT increase?
Said Iqbal: We are calling for an increase in the minimum wage by eight to ten percent in 2025 to better align with the needs of workers and boost their purchasing power. Furthermore, we recommend adjusting sectoral minimum wages to reflect the specific economic conditions of different industries.
Interviewer: If the government goes ahead with the VAT increase without addressing the minimum wage issue, what actions will KSPI take?
Said Iqbal: Should the government implement the VAT increase without raising wages, KSPI and other labor unions are prepared to organize a national strike across Indonesia. We believe it is crucial to stand firm against policies that unjustly burden low-income earners while failing to hold larger corporations and wealthy individuals accountable for their tax contributions.
Interviewer: Thank you for sharing your insights, Mr. Iqbal. Your perspective on this critical issue is invaluable.
Said Iqbal: Thank you for the opportunity to discuss these concerns. It’s essential for all voices, especially those representing workers, to be heard in these discussions.
Additionally, KSPI urges the government to cancel the VAT increase. They suggest improving tax collection by targeting larger corporations and wealthy individuals instead of burdening low-income earners.
If the government proceeds with the VAT increase and does not raise the minimum wage, KSPI and other labor unions plan to hold a national strike across Indonesia.