The Indonesian government’s tax hike on entertainment services has sparked widespread debate. Effective from January 2024, the tax rate surged up to between 40–75 per cent, up from 25–35 per cent for the specific goods and services tax in venues such as bars, nightclubs, beach clubs, karaoke lounges and spas.

This proposal faced industry opposition, prompting its suspension for reassessment given the potential effects on the public, tourism and small businesses.

The policy move highlights Indonesia’s quest for additional revenue streams. By raising taxes on entertainment services, the government hopes to bolster funding for public programs. Though this tax increase might offer short-term revenue gains, it could burden businesses and consumers in the long run.

This abrupt change caught the industry off guard due to the lack of consultation with stakeholders. A jump from a maximum of 35 per cent to 75 per cent places a heavy weight on many enterprises — especially since those in the entertainment sector often rely on low-income workers. This circumstance could lead to job losses and business closures that threaten economic stability and social development.

Excessive taxes risks pushing businesses into the informal economy or fostering tax evasion. Tax collection efforts and sustainable fiscal revenue could suffer as a result. If taxes disproportionately burden certain sectors or regions, the policy could exacerbate inequalities and impede inclusive economic growth.

The new tax rate adjustment could trigger higher prices and less demand for entertainment services. The tax hike and accompanying price increases may further dissuade domestic tourists, who are typically drawn to budget-friendly options.

Excessive entertainment taxes could also undermine Indonesia’s global tourism competitiveness. Neighbouring destinations might become more appealing. In 2024, Thailand cut the excise tax on venues from 10 per cent to 5 per cent, and Malaysia lowered its entertainment tax by 5 per cent to 10 per cent. Such reductions enhance their allure to international tourists, potentially narrowing Indonesia’s market share.

It is unlikely that Indonesia will be able to leverage this opportunity to raise travel costs and pivot towards high-end destinations to boost revenue. Indonesia’s tourism sector, renowned for its affordability, attracted millions of international visitors in 2023 — including around 1.37 million Australians and 707,000 Chinese tourists. Most of these tourists prioritise value over luxury. Indonesia may struggle to shift its focus and earn revenue through higher-end offerings.

Increasing travel costs may discourage these tourists from coming to Indonesia. Despite an influx of high spenders, overall tourism revenue could still decline with fewer visitor arrivals. Over-reliance on high-spending consumers may render the industry more vulnerable, leading to instability if this group loses interest or faces economic challenges.

High-end tourism doesn’t just revolve around high prices, it is about offering unique and top-quality destination encounters. It calls for effective infrastructure, ample environmental resources, innovative tourism products and alluring experiences. Government subsidies and incentives are vital for these initiatives.

The expected decline in tourist arrivals also might bring positive changes. Indonesia has been facing adverse effects of overtourism, including overcrowding, traffic congestion, environmental pollution and safety hazards. The proposed tax increase could potentially stabilise tourist arrivals, alleviating the negative consequences of this tourism overload.

To enhance tourism services and reduce environmental pressures from overtourism, Bali has taken steps such as raising tourism-related prices and introducing a tourism tax of Rp 150,000 for foreign visitors, starting in 2024. The increase in entertainment taxes strengthens regulation in the tourism sector. But the exact impact of these measures remains uncertain and requires further assessment. Excessive entertainment taxes might reduce tourists’ willingness to spend, impacting overall tourism revenue — but moderate taxation could promote the sustainable growth of the tourism industry.

Expanding the entertainment tax to include spas and wellness centres may have multifaceted impacts. While higher costs could deter participation and curb tourism’s well-being benefits, it might also alleviate overtourism. This could enhance each tourist’s wellness experience, fostering deeper physical and mental healing within a constrained timeframe.

Indonesia is celebrated for its diverse wellness traditions, combining Indian, Arabic and Chinese influences. Tourists can experience a range of healing treatments, from traditional aromatherapy in Surakarta to immersive health journeys in Yogyakarta’s villages and spa retreats in Bali.

Recent research has introduced the concept of travel therapy, which can promote physical and mental health through physical activity, social interaction, positive emotions, healthy eating and therapeutic landscapes and services. Travel therapy has the potential to benefit healthy people and those in suboptimal health or dealing with health conditions.

Travel therapy could also contribute to advancing key social agendas, including promoting healthy ageing and achieving sustainable development goals — such as ‘good health and wellbeing’ and ‘reduced inequalities’. Health-supporting products and services, such as spas and wellness activities, should be strongly supported to work toward these goals. As Indonesia is globally recognised for its wellness offerings, the country should leverage its strengths in this sector to attract more tourists instead of implementing measures that could hamper its development.

The Indonesian government must consider multiple factors when reassessing the entertainment tax to strike a balance between revenue, industry development and societal wellbeing. Careful decisions are necessary to ensure favourable outcomes for all stakeholders.

Fangli Hu is PhD candidate in Public Health at the Centre for Precision Health, Edith Cowan University.

Jun Wen is Lecturer in Interdisciplinary Research between Tourism and Health at the School of Business and Law, Edith Cowan University.