The Indonesian government has set an ambitious target of Rp7,500 trillion in national investment by 2026 to maintain economic growth above 5.9 percent. However, this raises a fundamental question: how capable is the country’s fiscal system, particularly taxation, in supporting this major agenda?
Amid global economic uncertainty and widening deficits, the nation’s ability to manage revenue is key. A strong tax system is not only essential for financing public spending but also for ensuring stability and maintaining market confidence.
Dr. Rijadh Djatu Winardi, a taxation expert and lecturer at the UGM Faculty of Economics and Business (FEB UGM), stated that Indonesia’s current tax system is not yet robust enough to sustain long-term economic growth.
He noted that state revenue remains overly reliant on specific sectors, such as the tobacco industry, and on certain types of taxes, such as corporate income tax.
“This dependency creates structural vulnerabilities in the state budget when a key sector is hit by a crisis. In the long run, such a narrow revenue base will limit the government’s fiscal flexibility,” he explained on Tuesday (Jul. 8) at UGM.
This vulnerability becomes even more apparent when examining Indonesia’s tax ratio trends. From 10.31% of GDP in 2023, the ratio fell to 10.07% in 2024, far below the ASEAN average of 14–15% and well behind OECD countries, which average around 34%. For nearly two decades, Indonesia’s tax ratio has remained stagnant between 9% and 12%.
A low tax ratio narrows fiscal space for capital spending, even though infrastructure and public services are crucial drivers of investment. Without strong fiscal support from the government, private sector investment may also decline.
“This reflects the fragility of our fiscal independence in financing development,” Dr. Winardi emphasized.
One of the root causes, he said, is the low contribution from personal income tax, especially from high-income individuals. In many countries, personal income tax forms the backbone of tax revenue.
In Indonesia, however, voluntary compliance remains low, and the tax base is too narrow. Tax reform should aim to improve compliance among higher-income groups without creating incentive distortions, helping to build a fairer and more effective tax system.
“Our issue isn’t high tax rates, but a weak base. That’s what must be fixed urgently,” the expert added.
Dr. Winardi stressed that expanding the tax base is currently the top priority. Without a broad base, he said, tax digitalization efforts would merely accelerate the documentation of an already limited potential.
Informal economic actors and micro, small, and medium enterprises (MSMEs) must be actively engaged through incentive-based approaches and simplified administrative processes. If done correctly, this strategy could significantly widen the base without sparking resistance.
“Even the most sophisticated system is meaningless if the number of compliant taxpayers remains minimal,” he stated.
He noted that the informal sector and MSMEs hold significant potential to strengthen the national tax base. However, two main challenges persist: low compliance awareness (compliance gap) and policies that have yet to facilitate formal entry into the tax system (policy gap).
A proportional approach, such as simplifying tax administration to suit small businesses, can create an ecosystem that encourages informal actors to scale up while enhancing fiscal self-reliance.
“The government must also engage informal sector associations and cooperatives to reach the untapped base,” he said.
Dr. Winardi also pointed out the growing digital and e-commerce sectors, which have yet to make an optimal contribution to state revenue. He argued that digital systems, such as the Core Tax System, will be effective only if paired with integrated transaction data and inter-agency collaboration.
Partnerships between the Directorate General of Taxes (DJP), digital platforms, and financial institutions are essential for enabling automatic transaction reporting. With comprehensive data integration, monitoring can be conducted in real-time and risk-based.
“The DJP would be far more effective with full access to e-commerce data to support tax collection in the digital sector,” he explained.
Regarding investment promotion, Dr. Winardi acknowledged the importance of fiscal incentives but warned that they must not undermine state revenue. Incentives should be periodically evaluated and tied to the performance of beneficiaries to ensure they are targeted and do not become a long-term burden.
“Incentives should catalyze growth, not merely shrink the tax base,” he said.
Furthermore, the expert emphasized the need for long-term tax reform that focuses not only on revenue but also on fairness and sustainability. The overhaul must include regulatory simplification, the adoption of technologies such as Artificial Intelligence (AI) for tax oversight, and fiscal policies that support energy transition and environmental goals.
Such strategies are essential to ensure Indonesia’s fiscal policies remain aligned with global agendas and structurally resilient.
“Green fiscal policy must become a priority. Taxes should support development that is not only pro-growth but also pro-sustainability,” he said.
Concluding his remarks, Dr. Winardi emphasized that comprehensive and consistent tax reform is vital to achieving national investment targets. The government must expand the tax base by actively reaching the informal and digital sectors, simplify the tax system for small businesses, and foster voluntary compliance across all groups.
Simultaneously, fiscal incentives should be data-driven and outcome-focused, rather than based on assumptions and speculation.
“If we can restructure the tax system to be fairer, broader, and more adaptive, I believe our fiscal space will strengthen, and the Rp7,500 trillion investment target will become an achievable collective goal,” he concluded.
Author: Triya Andriyani
Illustration: Freepik