The Impact of the 11% VAT Policy on the Economic Welfare of MSMEs

Abstract

The Value Added Tax (VAT) rate adjustment to 11% is part of Indonesia's national fiscal reform to strengthen state revenue and sustain development financing. However, its implementation has significant economic implications for Micro, Small, and Medium Enterprises (MSMEs) actors who are constrained by limited capital structure, production efficiency, and market bargaining power. This study aims to analyze the implications of the 11% VAT policy on MSMEs actors' economic welfare in Indonesia. A qualitative approach with a  Literature Review  design was employed, analyzing 16 selected national and international articles indexed in reputable databases (2021-2025). Thematic analysis identified VAT impact patterns on business costs, selling prices, market demand, income, and MSMEs tax administration aspects. Based on Pigou's Welfare Theory and Fiscal Incidence Theory, findings reveal that 11% VAT indirectly increases MSMEs production-distribution costs. Most MSMEs cannot fully shift the tax burden to consumers due to high price sensitivity and local market competition, resulting in backward shifting that compresses profit margins. Price increases also weaken consumer purchasing power, reducing MSMEs' sales volume and causing income instability. This literature study concludes that the 11% VAT significantly and negatively impacts MSMEs actors' economic welfare. Complementary policies are urgently needed, including tax incentives expansion, administrative simplification, and strengthened tax education programs, ensuring state revenue targets balance with MSMEs sector sustainability.