As Indonesia prepares for a significant rise in the Value Added Tax (VAT) to 12% starting January 1, 2025, real estate investors should be keenly aware of the potential impacts this shift may have on the property market, tourism growth, and overall investment potential. While this news may initially seem daunting, there are several reasons to view it as an opportunity rather than a setback.

Read more: Indonesia Property Tax for Foreigners: A Comprehensive Guide

Understanding the VAT Increase

The planned VAT hike from the current rate of 11% is part of a broader tax reform strategy outlined in the Harmonization of Tax Regulations Law (UU HPP). This legislation, which was enacted in 2021, aims to bolster state revenues, which have been under pressure from fluctuating economic conditions and a global landscape still recovering from the impacts of the pandemic. The increase aligns Indonesia’s VAT with rates in many developed countries, while remaining competitive with neighboring nations in the region. For context, as of December 2022, the average VAT rate across the Organization for Economic Co-operation and Development (OECD) member countries stood at 19.2%, while countries like Japan and South Korea maintain a VAT rate of 10%. Thus, Indonesia’s upcoming rate, though higher than the current level, remains relatively modest in a global context.

Timeline for Implementation

According to information sourced from Taxation: Introduction to KUP, Income Tax, and VAT by Setu Setyawan, the government has confirmed that the VAT increase to 12% will take effect by January 1, 2025. This gradual increase allows businesses and consumers time to adapt to the new tax landscape. The VAT is levied on the sale of goods and services by taxable entrepreneurs (PKP), who are responsible for collecting and reporting the tax, though the actual tax burden is ultimately passed on to the final consumer.

Impact on Consumer Purchasing Power

Critics of the VAT increase have raised concerns that it could strain consumer purchasing power, potentially leading to a decline in overall spending. Nailul Huda, Director of the Digital Economy at the Center of Economic and Law Studies, has highlighted that the increase may erode disposable income, which could be contradictory to the government’s goal of fostering economic growth. Moreover, concerns have been expressed that this policy could inadvertently lead to rising unemployment, with the Central Statistics Agency (BPS) reporting an unemployment rate of 4.82% as of February 2024.

However, it is essential to recognize that Indonesia’s property market operates within a unique context, driven by growing interest from both domestic and international investors. Tourism, particularly in popular destinations, continues to fuel demand for real estate, creating resilience against economic fluctuations. Strategic locations across the country such as Lombok and Bali, with their thriving tourism sectors, can help offset the potential negative impacts of the VAT increase.

Tourism Growth: A Silver Lining

The allure of Indonesia’s destinations, from its serene beaches to vibrant cultural hubs, continues to grow. Strategic areas such as Lombok, with their well-developed infrastructure and natural beauty, have consistently attracted a steady influx of visitors. This creates a dynamic market for real estate investments in areas catering to tourism, including luxury villas, boutique lodgings, and eco-friendly accommodations.

In addition, the government has been keen on promoting emerging destinations as alternative travel options, particularly following the pandemic, when many travelers sought less crowded and more serene locations. This proactive approach to tourism can further bolster the local economy and enhance property values.

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Strategies for Real Estate Investors with VAT-Registered PMA Companies

With the upcoming VAT increase to 12%, VAT-registered PMA real estate investors can employ strategic practices to mitigate or even offset the additional tax burden:

1. Input VAT Offsetting and Accelerated Deductibles

By increasing capital expenditures on properties before the VAT hike, investors can benefit from the current 11% VAT rate and claim input tax credits on qualifying expenses, including renovations, operational assets, and capital improvements. This allows for a reduction in net VAT payable. Additionally, by planning certain high-cost purchases or services that fall under deductible input VAT, investors can use the higher rate to their advantage post-implementation.

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2. Use of VAT-Free Zones for Supporting Operations

Establishing secondary business operations or sourcing services from Indonesia’s designated VAT-free zones (like Batam) can reduce VAT liability. While primary property sales are subject to VAT, secondary or support operations that provide materials, supplies, or contracted services (where feasible) from these zones help avoid excessive VAT outlays, improving overall cash flow.

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3. Strategic Pricing Adjustments with Bundled Offerings

Investors may consider restructuring pricing to incorporate bundled services (such as property management, maintenance, and hospitality services), which can be set at VAT-exclusive rates when targeting international clients. Carefully planned bundling allows a distribution of the tax impact across various cost centers, potentially lessening the burden on primary property offerings.

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4. Claiming VAT Refunds for Export Services

For investors with properties used in the tourism sector (short-term rentals or eco-resorts), certain services may qualify as “exports” if leased to foreign clientele for stays under six months, potentially allowing VAT refunds under Indonesian tax regulations. Engaging with tax advisors to formalize these claims can result in significant VAT recovery, helping to offset the increased rate.

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5. Capital Investment into Green Initiatives with VAT Incentives

With Indonesia’s emphasis on green energy, sustainable property upgrades, such as solar installations, water-saving systems, and other eco-innovations, may qualify for VAT incentives or partial exemptions. These upgrades not only appeal to sustainability-focused clients but also help reduce taxable expenses, with some government programs supporting green property investors.

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6. Advance Payments and Long-Term Lease Arrangements Pre-2025

Investors can incentivize clients to make advance payments or commit to long-term lease arrangements before the VAT rate increases. By locking in the current rate through early payment agreements or longer contracts, clients avoid the higher tax, while investors benefit from improved cash flow and stable tenancy.

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7. Professional Accounting Techniques for Deferred VAT Liabilities

Using deferred VAT liability strategies, PMA companies can spread VAT obligations over multiple fiscal periods. By choosing deferred payment structures or setting up split invoicing on certain long-term contracts, companies can minimize immediate tax payments and optimize cash flow in high-expenditure years.

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8. Leveraging Indonesia’s Double Taxation Agreements (DTA)

For foreign investors or those targeting foreign buyers, leveraging Indonesia’s DTAs with partner countries can help manage VAT obligations through allowable credits or exemptions in qualifying cases. Partnering with a seasoned tax expert ensures proper documentation, compliance, and advantageous positioning under these agreements.

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9. Adjusting Marketing and Operational Costs as VAT Deductibles

Shifting some operations to prioritize marketing efforts or qualifying services that generate VAT-deductible expenses can increase input VAT, offsetting the increased VAT rate for output tax. This strategy is particularly effective when aligning expenses with the launch of tourism-centered properties that capitalize on regional growth.

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A Call to Action for Investors

While the rise in VAT to 12% presents certain challenges, it also heralds a new chapter for Indonesia’s property market filled with opportunities. Investors should remain optimistic, recognizing that the country’s growing tourism industry and evolving market dynamics can counterbalance the effects of this tax increase.

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For those looking to invest, now is the time to assess properties that align with tourism growth and sustainability trends. By adapting to market demands and harnessing the potential of this vibrant destination, investors can continue to thrive in Indonesia’s real estate landscape, turning challenges into opportunities for success.

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As you consider your investment strategy, keep an eye on market trends, and be ready to embrace the exciting developments on the horizon. The future is bright for those willing to adapt and innovate in this dynamic environment, and with strategic planning, investors can navigate the upcoming VAT changes and continue to reap the rewards of their investments.