Why Hospitality Sector is Alarmed By Indonesia’s New Tax Policy & Impact on the Travel Sector

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Indonesia’s planned VAT hike to 12% in 2025, coupled with a 50% cut in government travel budgets, threatens hotel earnings, consumer spending, and jobs.

The Indonesian Hotel and Restaurant Association (IHRA) has voiced strong concerns over the government’s decision to increase the value-added tax (VAT) from 11% to 12% starting January 1, 2025. The association warned that this move could weaken consumer purchasing power and significantly impact business revenues. As a result, many operators in the hospitality sector may be forced to reduce their workforce to sustain operations.

This planned tax adjustment is part of the government’s strategy to enhance state revenue. However, industry players believe the timing is less than ideal, as the hospitality sector is already grappling with declining consumer spending. The additional financial burden on customers could further strain businesses, making it harder for them to recover from previous economic challenges.

IHRA has called on the government to reconsider the implementation of the tax hike. They argue that the policy could cause long-term damage to the industry, which is still recovering from disruptions in recent years. A more thoughtful approach is needed to balance state budget requirements with the sustainability of businesses.

The situation is further exacerbated by the government’s decision to reduce its travel budget by 50% in 2025. This cutback poses another significant challenge for the hospitality industry, as government travel is a major source of income for hotels, particularly those in the budget and mid-scale categories. Such a reduction could shrink revenue streams and disrupt operations across the sector.

In certain regions like Sulawesi and Papua, government travel contributes up to 70% of business for many hotels. With both the VAT hike and reduced travel spending looming, the hospitality industry faces a double blow. IHRA is urging policymakers to evaluate the potential repercussions carefully and prioritize measures that support the sector’s stability and growth.