Economy-wide impacts of zero-rated VAT on exports of business services in Indonesia: A CGE analysis

Abstract

The Indonesian government expanded the zero-rated VAT regime on exports of services to include information and technology services, research and development services, and professional services and a number of other activities as stipulated in the Minister of Finance Regulation Number 32 Year 2019. This research projects economy-wide impacts of the policy with respect to information and technology services, research and development services, and professional services using the Global Trade Analysis Project (GTAP) model. Both short-run (i.e. fixed labour and capital) and longer-run (fixed labour with variable capital) economic environment is set to compare the results derived from two scenarios: elasticity scenario (i.e. rebating input VAT by 1%) and policy scenario (i.e. rebating input VAT by 4.57%). The main findings are that, although a majority of sectors are likely to contract in the short run due to the relocation of some resources in favour of business services, there is a likely long-run national economic benefit reflected by projected increases in export volume of business services, real wages, particularly for skilled labour, and real income.