Government-borne VAT on Home Purchases

By Andrean Rifaldo, the Directorate General of Taxes officer

In 2023, the housing backlog remained at 12.71 million. This gap between the number of constructed houses and the demand equates to 14 percent of the national household population.

Indeed, this figure isn't as severe as Hong Kong's, where 37 percent of households lack the financial means to purchase residential properties due to soaring real estate prices.

However, this issue still warrants serious attention. Currently, 15.21 percent of families still do not have their own homes yet. In metropolitan areas, this percentage is even higher due to dense populations driving up prices and reducing available housing.

One such example is Jakarta, where the population density is the highest nationwide, reaching 16,000 people per square kilometer. This equates to roughly 62 individuals residing within every square meter of land in the Indonesian capital.

The demand for housing outweighs the available supply, leading to a rise in property prices. According to data from Cushman & Wakefield, cited from Litbang Kompas (7/8/2023), the average land price in Jakarta stands at Rp15.67 million (~$1,000) per square meter. Furthermore, prices continue to increase by 2-3 percent each year.

This means that it takes 18 years, setting aside 30 percent of the Regional Minimum Wage income, to afford land for building the smallest type of house, excluding construction costs. As a result, 4 out of 10 households are still living on land owned by others.

Various steps have been taken by the Indonesian government. One of them is the initiative by the Ministry of Public Works and Housing, which this year has allocated a budget of Rp13.72 trillion ($884.7 million) to fund the Housing Financing Liquidity Facility program, providing 166,000 housing units for low-income communities.

However, this program has yet to reach households whose purchasing power, while not classified as low-income, is still inadequate to purchase their own homes. Furthermore, the quantity of 166 thousand units falls far below the target of 1.5 million houses per year needed to achieve zero percent backlog by 2045.

The government has once again reintroduced a policy to bear the Value Added Tax (VAT) on home purchases. This VAT borne by the Government (PPN DTP) incentive is stipulated in Minister of Finance Regulation (PMK) No. 7/2024.

A similiar policy was previously implemented throughout 2021 and 2022. However, the aim of that policy was to stimulate the economy, particularly the property sector, which experienced a significant downturn during the pandemic.

Beginning in November 2023, this incentive has been reintroduced, but with a slightly different aim: this time, it is to boost the purchasing power of the community to address the housing backlog.

Initially, the incentive was targeted to only apply until the VAT period of December 2023. However, the latest Minister of Finance regulation has decided to extend the relief until December 2024.

By regulation, there are indeed several categories of specific houses for which the VAT exemption applies upon purchase. These include modest and very modest homes for low-income individuals, as well as specific types of simple apartment units.

Outside of those categories, purchasing a house will incur VAT at 11 percent of the price. For instance, if you're buying a house priced at Rp400 million (~$25,800), you'll incur a VAT cost of Rp44 million (~$2,800), not including other expenses like Land and Building Acquisition Tax, and Deed of Sale and Purchase processing fees.

With this incentive, the government will bear the VAT for house purchases priced below Rp5 billion. This implies that purchases above this threshold cannot benefit from the incentive

For instance, for a house purchase priced at Rp6 billion (~$387,100), the VAT amounting to Rp660 million (~$42,500) will not be covered by the government and will be borne by the buyer themselves.

Additionally, this incentive only applies to the purchase of new houses and apartment units, whether paid in cash or through credit. However, the down payment or first installment must not have been made before September 1, 2023.

For eligible house purchases, there are two incentive schemes available depending on when the house is handed over. Under the first scheme, for house purchases with the handover taking place between January 1st and June 30th, 2024, the government will cover the VAT up to a maximum of Rp220 million (~$14,000).

For example, for a house priced at Rp700 million (~$45,100), the VAT of Rp77 million (~$5,000) will be fully covered by the government. However, for a house priced at Rp3 billion (~$193,500) with a VAT of Rp330 million (~$21,300), the government will only cover up to Rp220 million (~$14,200) of the VAT, and the remaining Rp110 million (~$7,100) will be borne by the buyer.

Under the second scheme, for house purchases with the handover taking place between July 1st and December 31st, 2024, the following provisions apply: for houses priced up to a maximum of Rp2 billion (~$129,000), the government will cover 50 percent of the VAT; while for houses priced between Rp2 billion and Rp5 billion (~$322,600), the government will cover Rp110 million (~$7,100) of the VAT.

For example, for a house priced at Rp700 million (~$45,100) with VAT of Rp77 million (~$5,000), the government will cover half of it, which is Rp38.5 million ($2,500), while the remaining half, also Rp38.5 million, will be borne by the buyer.

Meanwhile, for a house priced at Rp3 billion (~$193,500) with a VAT of Rp330 million (~$21,300), the government will only cover Rp110 million (~$7,100) of the VAT, and the remaining Rp220 million (~$14,200) will be paid by the buyer.

To prevent its misuse for property investment, which could worsen the housing shortage, this incentive is limited to individuals only and can be utilized only once for the purchase of a single house unit. Additionally, the property cannot be transferred within one year since the handover.

If violations of these requirements are discovered, the Directorate General of Taxes may reclaim the VAT that should have been paid in accordance with tax regulations.

The incentive is expected to stimulate purchasing power in the housing sector. This is because, in similar policies in 2021 and 2022, the results were quite positive.

In 2020, homeownership increased by only 0.06 percent due to the weakening property sector caused by the pandemic. However, in the two years that followed, the figure managed to grow significantly, reaching 83.99 percent.

This success is hoped to be repeated, this time, to achieve the target of zero backlog by 2045.

*) This article represents the author's personal views and does not represent the stance of the institution. The Indonesian version of this article has been published in Kompas.com on March 12th, 2024.

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