The Potential Distributional and Economic Wide Impact of the New Indonesia’s VAT Law Implementation

Authors: Rus’an Nasrudin1, Djoni Hartono, Faizal Rahmanto Moeis, Andhika Putra Pratama, Raka Rizky Fadilla, and Rustam Effendi

Executive Summary

This article summarises the distributional and economic-wide impact of several policy scenarios of recent tax policy changes in Indonesia. Some of the scenario’s designs are directly drawn from the changes in the new Indonesian tax law or UU HPP (Law on Harmonization of Tax Regulations) concerning broadening the value-added tax (VAT) base. We use a Computable General Equilibrium (CGE) and Microsimulation approach to calculate the impact of these scenarios on economic growth, inflation, government revenue, poverty and inequality. All the scenarios intended to make the tax system simpler and more efficient, with less distortion, and broaden the tax base resulting in low to moderate effects on both macro and distributional indicators accompanied by a significant increase in the government revenue. Our results provide an ex-ante impact evaluation of the current VAT Law Implementation.

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