A significant rise in the minimum wage will increase operational costs while a value-added tax (VAT) hike may weaken demand for products and services, they argue.

The lobby groups are calling for additional incentives, such as a temporary reduction in corporate income tax and regional taxes as well as subsidies for the employer’s portion of the monthly contribution to the Workers Social Security Agency (BPJS Ketenagakerjaan).

On Monday, the government announced several incentives to soften the impact of the VAT hike from 11 percent to 12 percent, which will kick in on Jan. 1, 2025, coinciding with a 6.5 percent minimum wage increase.

These measures include a 5 percent cut in loan interest rates for labor-intensive industries, such as textiles, footwear and furniture, for investment to modernize machinery. The government has also extended a temporary reduction in the final income tax (PPH Final) rate, set at 0.5 percent instead of 1 percent, on revenue from micro, small and medium enterprises (MSMEs) through next year.

Shinta Kamdani, chairwoman of the Indonesian Employers Association (Apindo), described the incentives as a starting point for improving production efficiency in labor-intensive industries currently facing significant challenges.

However, she added that the incentives were insufficient to fully offset the combined impact of the simultaneous minimum wage and VAT increases. The situation was further exacerbated by the current pressure from weakened spending power and an influx of imported goods.