The VAT is Increasing, Frugal Living Habits Are Rising

Many Indonesians, especially on social media, are starting to apply frugal living habits in order to prepare for the increase of Indonesia’s Value Added Tax (VAT) rate to 12% next year.

Through careful spending, prioritizing savings, and cutting down on non-essential purchases, this action has been fueled by economic uncertainty, the rising cost of living, and a growing awareness of financial literacy.

Digital platforms, social media influencers, and online communities advocating minimalism and frugality have also played a significant role in spreading this mindset.

Impacts of VAT Increase to 12%

From a business perspective, the effects are multifaceted:

1. Shift in Consumer Demand
   With consumers increasingly opting for essential and lower-cost items, businesses offering luxury or non-essential products have seen reduced sales. This has forced companies to rethink their pricing strategies and diversify their offerings to include more affordable options.
2. Growth of Second-Hand and Sharing Economies
   Frugal living enthusiasts are turning to second-hand markets and sharing platforms for affordable alternatives. Businesses operating in resale, rental, or sharing services—such as thrift stores and online marketplaces—are experiencing a surge in demand, while traditional retail struggles to keep up.
3. Impact on Retail and FMCG Sectors
   The fast-moving consumer goods (FMCG) sector, a staple in household consumption, has also felt the impact. While demand for essentials remains steady, premium and higher-margin products have taken a hit. Companies are investing in smaller packaging sizes and promotional discounts to attract price-sensitive consumers.
4. Opportunities for Financial Technology (FinTech)
   FinTech solutions that promote budgeting, saving, and investment are thriving as they align with the frugal living mindset. Businesses in this sector have opportunities to expand their user base by providing tools and platforms to support consumer financial goals.
5. Challenges for Small and Medium Enterprises (SMEs)
   SMEs, particularly those in luxury goods or non-essential services, face challenges in adapting to changing consumer preferences. Many are adopting cost-cutting measures, streamlining operations, and pivoting to online sales channels to remain competitive.

Adapting to the New Norm

For businesses in Indonesia, understanding the dynamics of the frugal living action is essential for survival and growth. Strategies to navigate this shift include:

• Focusing on Value Proposition: Offering affordable yet high-quality products and services can capture the frugal consumer market.
• Leveraging Digital Platforms: Online marketing and e-commerce can help businesses reach wider audiences and reduce operational costs.
• Sustainability Initiatives: Highlighting sustainable and environmentally friendly practices resonates with the minimalist ethos of frugal consumers.
• Innovating Product Lines: Developing budget-friendly alternatives and promoting essential items ensures continued relevance.

The frugal living action, coupled with Indonesia’s 12% VAT, is reshaping consumer habits and business strategies. While the challenges are evident, businesses that adapt by prioritizing affordability, sustainability, and digital engagement can not only weather the storm but thrive in the new economic landscape.

References:

[1] https://snapcart.global/the-impacts-of-the-12-vat-increase-in-2025-toward-the-fmcg-sector/

[2] https://www.campaignasia.com/article/indonesias-vat-hike-raises-concerns-about-consumer-spending-and-business-strateg/499601

[3] https://www.reuters.com/markets/asia/indonesias-finance-minister-defends-plan-raise-vat-january-2024-11-14/

[4] https://theleap.id/detail/276/frugal-living-a-financial-revolution-among-indonesia-s-youth