Indonesia VAT Hike in Doubt as Lawmakers Show Emerging Rifts

(Bloomberg) -- Indonesia’s planned increase to the value-added tax could be in question after several lawmakers called for a delay, showing how rifts may be emerging in parliament as the largest ruling party is set to fall to opposition.

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Several lawmakers in the commission overseeing the economy urged the government to delay the VAT hike from next year as it may damp consumers’ purchasing power, they said in a Tuesday meeting with Finance Minister Sri Mulyani Indrawati. The government plans to raise the VAT rate to 12%, from 11%, as stated in a law passed in 2021.

“Higher tax rates will hurt the economy, especially the middle class, amid high interest rates and rising domestic prices,” said Andreas Eddy Susetyo, a lawmaker in the Indonesian Democratic Party of Struggle, or PDI-P.

The pushback shows how the country’s next administration may face a more fractured parliament than under President Joko Widodo, who relied on a large majority of support from lawmakers to push through his legal reforms. Now the biggest ruling party PDI-P, which holds nearly a quarter of the seats, is set to become the opposition while remaining the largest party in parliament following legislative polls on Feb. 14, when its presidential candidate likely lost to Prabowo Subianto.

PDI-P is no stranger to opposition politics, having played the role under former dictator Suharto and again under ex-leader Susilo Bambang Yudhoyono. The party, whose ideology is rooted in championing the underprivileged, could pose an obstacle for a Prabowo administration to pass through campaign promises that include free school lunches.

Other legislators including from the Social Justice Party, or PKS, also opposed the VAT increase.

--With assistance from Faris Mokhtar.

(Adds more context on PDI-P in fourth and fifth paragraphs.)

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