Government Policy Impact on the Development of the VAT Rates

The relevance of the research topic is due to the Indonesian government’s policy plan which will increase the VAT rate from 11% to 12% in early 2025, and has become a hot topic. The aim of this research is to provide the best alternative policy options by providing comprehensive solutions. The research method uses a system dynamics simulation model, employing qualitative and quantitative approaches facilitated by Powersim constructor software by considering three scenarios: pessimistic, moderate, and optimistic. This study uses six main variables and three additional variables. The research results reveal that, in a pessimistic simulation scenario, an increase in the VAT rate will reduce people’s purchasing power and increase tax avoidance. In a moderate scenario simulation, there will be a balance in economic conditions, but in the future, this will reduce the potential for taxes and increase tax avoidance. In an optimistic scenario, reducing the VAT rate will reduce the tax burden, increase potential tax purchasing power, increase exports, and reduce imports, while decreasing tax avoidance and increase tax potential. This research concludes that, of the three scenarios, the best choice is to use the optimistic scenario because it will benefit overall economic conditions. It recommends that the government should reduce the tax avoidance ratio and simplify the supply chain, as supply chain complexity contributes to increased costs.

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