Indonesia’s Digital VAT: A Progressive Solution for Revenue and Equity

• Indonesia needs to increase tax revenue while ensuring social equity.
• A modernized value-added tax system with a uniform rate across all goods and services and real-time digital compensation for low-income households is a potential solution.
• This reform could generate billions in revenue for public services while protecting vulnerable populations.
• Indonesia’s growing digital adoption and tax modernization efforts create ideal conditions for implementation.
• Indonesia’s value-added tax system struggles to balance the need for revenue with the risk of regressivity.
• A progressive VAT with a single rate and real-time compensation for low-income earners offers a viable solution.
• Indonesia’s tax-to-GDP ratio has stagnated at around 10-12 percent for the last decade.
• The government initially proposed raising the VAT rate to 12 percent but revised the policy to maintain the effective rate at 11 percent.
• The global average VAT rate of 15 percent suggests room for a modest rate increase.
• A modern VAT system is designed for simplicity and efficiency by taxing all goods and services at a uniform rate.
• VAT’s regressive nature disproportionately burdens lower-income households.
• A modern VAT system can address this issue by incorporating a compensation mechanism that provides direct, real-time reimbursements to eligible low-income consumers.
• The integration of the Core Tax Administration System with existing digital payment platforms presents a viable solution for implementing such a system.
• The digital reimbursement mechanism proposal was supported in the International Monetary Fund’s Designing a Progressive VAT working paper.

Source: eastasiaforum.org

Note that this post was (partially) written with the help of AI. It is always useful to review the original source material, and where needed to obtain (local) advice from a specialist.

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