SHOULD WE FOLLOW THE WORLD BANK?: A CASE OF VAT THRESHOLD IN INDONESIA

Abstract

In mid-2024, the World Bank advised Indonesia to lower the VAT threshold from IDR 4.8 billion to IDR 600 million. This is in line with the World Bank's previous advice in 2020 and 2021. This study aims to evaluate that World Bank's suggestion. The method used in this research is a mixed method between quantitative methods and qualitative methods. The quantitative method is done by conducting OLS regression with cross-section data between countries to see the factors that determine the VAT threshold in a country. The independent variables analyzed include the percentage of employees working in MSMEs, GINI ratio, GDP per Capita (PPP), and dummy variables that indicate the country category, namely high-income country, low-middle income country, upper-middle income country, and low-income country. Then, a qualitative analysis was conducted to evaluate Indonesia's VAT threshold from four sides: compliance cost, proportion of employees working in MSMEs, income inequality, and bunching phenomenon that will occur due to the reduction of VAT threshold. The results of this study conclude that the VAT threshold is purely a policy of a country where political priorities and policy direction are important. In addition, if we look at the four sides studied in qualitative analysis, reducing the VAT threshold is not feasible at this time.