Strategies for businesses to cope with the 12% VAT rate

The impact of the 12% VAT on businesses

As a business owner, you are probably aware of the government's plan to increase the VAT rate on taxable goods and taxable services to 12% in 2025. This policy, which is stipulated in Article 7(1) of the Harmonized Tax Act (UU HPP), aims to increase government revenue.

VAT is a tax levied on the consumption of goods or services within the country and is generally passed on to consumers. The increase in VAT can influence consumer behavior and purchasing power, which in turn has an impact on the business sector.

Here are some of the main effects of the VAT increase on businesses:

Increased production and operating costs

The VAT increase can lead to higher raw material prices, which will increase overall production costs. Operating costs, such as employee salaries, may also increase. Businesses may have to provide additional funds, which can reduce profit margins.

Adjustments to sales prices

Higher production and operating costs can mean that businesses, particularly taxable businesses (PKP), have to adjust the selling prices of their goods or services. In some cases, companies have to raise prices in order to maintain their profitability. However, it is important to adjust prices strategically to ensure that consumers continue to buy.

Declining consumer purchasing power

The 12% VAT increase can have an impact on consumer behavior and potentially reduce consumer purchasing power. Consumers may opt for cheaper products, which could lead to a decline in sales. Without effective strategies, the sustainability of businesses — especially small and medium-sized enterprises — could be jeopardized.

Increased competition in the industry

Companies will need to adapt their business strategies in order to continue offering products that meet consumer needs while remaining profitable. Competition between businesses within the same industry is likely to intensify, particularly when it comes to controlling costs and creating added value for customers.

Cash flow adjustments

Businesses will need to manage their cash flow more carefully to take account of monthly changes in VAT rates. Rising production and operating costs can lead to delays in payments to suppliers or creditors. This can disrupt business liquidity, particularly for small businesses.

Increased administrative costs

Due to the higher VAT rate, businesses will need to improve the accuracy of their tax records and reporting to comply with the new regulations. The VAT increase also complicates tax calculations, which takes more time. This can increase the administrative burden and associated costs, such as for software, accountants or staff training.

Goods and services subject to 12% VAT

The increase in VAT to 12% will affect various types of everyday goods and services. In general, 12% VAT applies to almost all goods and services, with certain exceptions as determined by the government. Below are some examples of goods and services that are subject to 12% VAT:

• Consumer goods: Examples include electronics, clothing, motor vehicles, food and beverages, and household furniture.
• Production goods: Examples include industrial raw materials, heavy equipment, industrial machinery and construction machinery.
• Digital goods: Examples include software and digital content such as music, movies and e-books.
• Services: Examples include transportation, communications, financial services, consulting and digital services.

Goods and services exempt from VAT

Certain goods and services are exempt from the 12% VAT, including

• Basic daily necessities: Such as rice, meat, fish, eggs, vegetables and milk.
• Healthcare services
• Services in the field of formal education
• Financial and insurance services
• Public transportation
• Social services
• Rental services for basic housing

Simulation: Calculation of the 12% VAT rate and its impact on businesses

The increase in the VAT rate from 11% to 12% of the tax base (DPP) may seem small on paper. In reality, however, this change can lead to a significant increase in your business expenditure.

Below you will find a simulation to calculate VAT and its impact on business expenditure:

Scenario: Company A is a snack manufacturer that buys 5 tons of corn flour in December 2024 at a pre-tax price of Rp4,000 per kg. This means that Company A spends a total of Rp20 million before VAT on the purchase of raw materials.

Calculation of VAT in December 2024 (VAT rate 11%):

Formula:

VAT = DPP x VAT rate

Calculation:

VAT = Rp20,000,000 x 11%

VALUE ADDED TAX = Rp2,200,000

Calculation of VAT for January 2025 (VAT rate 12%):

In January 2025, Company A still plans to purchase 5 tons of corn flour at the same price of Rp4,000 per kg, bringing the total purchase amount to Rp20 million. However, the new VAT rate of 12% applies in this month:

Formula:

VAT = DPP x VAT rate

Calculation:

VAT = Rp20,000,000 x 12%

VALUE ADDED TAX = Rp2,400,000

Effect of the VAT increase on business costs

Company A uses the following formula to determine the actual increase in the VAT burden due to the increase in the tax rate:

Formula:

Actual VAT increase = [(VAT (2) - VAT (1)) / VAT (1)] x 100%

Calculation:

Actual VAT increase = [(IDR 2,400,000 - IDR 2,200,000) / IDR 2,200,000] x 100%

Actual VAT increase = (IDR 200,000 / IDR 2,200,000) x 100%

Actual VAT increase = 0.09 x 100%

Actual VAT increase = 9.09%

Thus, the VAT burden on the purchase of cornmeal increases by 9.09% (or almost 10%) compared to the previous tax burden. If this increase is cumulated with the VAT on other taxable goods, it will have a significant affect on Company A's financial position.

In order to mitigate the financial impact of the 12% VAT, Company A needs to apply various business strategies to keep its financial position stable.

Business strategies for coping with the VAT increase

Faced with a 12% VAT rate, businesses need to take strategic measures to minimize the negative impact. Below are some strategies to help you manage the increase effectively:

1. Develop a pricing strategy

The first step is to develop a pricing strategy. Analyze whether the VAT increase should be fully passed on to customers or partially absorbed by the company. Excessive pricing could lead to a loss of sales as consumers may switch to the competition.

Consider different pricing for different customer segments. For price-sensitive customers, you should avoid significant price increases. For less price-sensitive segments, you can set higher prices to maintain reasonable profit margins.

2. Optimize operational efficiency

In addition to pricing, you will also need to adjust your operational processes to cope with the VAT increase. Reduce production costs by purchasing from suppliers who offer lower prices without compromising quality. Avoid overstocking to reduce inventory costs and minimize the risk of unsold goods.

Utilize technology such as inventory and accounting software to improve operational efficiency can also help. The right technology can save time and resources and ultimately streamline business operations.

3. Create added value

As mentioned earlier, a 12% VAT increase will increase competition in the industry. To stay competitive, you should differentiate your product by offering added value. For example, diversify your product range or run promotional campaigns.

You can also improve your customer service to create added value. Ensure that your customers receive high-quality products and excellent service when they do business with you. This will leave a lasting impression on your customers and make it harder for them to switch to your competitors.

4. Work with business partners

Another strategy is to work with business partners. Partner with vendors or merchants to negotiate better prices or payment terms.

Joint procurement can also help you get better prices through bulk purchases. Other forms of collaboration include sharing resources to reduce costs, such as by sharing warehouses or transportation services.

5. Efficient tax administration

To cope with the VAT increase, you should manage taxes efficiently. Accurately calculate the amount of tax payable, including input tax and output tax as part of the VAT payable.

Identify opportunities to reduce the tax liability, such as through tax credits or deductions. Consult accountants or tax advisors to optimize tax administration.

6. Build strong customer communication

Effective communication with customers is crucial when facing a 12% VAT increase. If you have to increase prices, you should communicate this clearly to your customers. Be transparent in explaining the reasons for the price increase, especially if it is due to the VAT adjustment.

Establishing good customer communication is a continuous process. Use digital platforms such as social media or email to maintain close relationships with your customers and provide up-to-date information on company policy.

Managing business expenses more efficiently with Aspire

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