A recent World Bank report reveals that Indonesia’s tax revenue performance lags behind that of neighboring countries. The country’s current tax-to-GDP ratio is only around 9%, far below the international standard of at least 15%.
This condition indicates that the government still faces major challenges in boosting state revenue, which has implications for fiscal sustainability and financial independence.
“Taxes are the government’s main source of revenue, and good tax collection performance reflects a country’s fiscal independence, reducing dependence on debt,” said Dr. Rijadh Djatu Winardi, an academic at Universitas Gadjah Mada (UGM), on Tuesday, Apr. 8, 2025.
Although Fitch Ratings considers Indonesia’s government debt ratio of 39.6% of GDP as of January 2025 to be relatively low, rising debt without corresponding increases in tax revenue could worsen the country’s financial burden.
He says several key issues contribute to Indonesia’s poor tax revenue performance.
First, the country loses up to IDR 546 trillion annually in potential revenue due to tax non-compliance, particularly in Value Added Tax (VAT) and Corporate Income Tax (CIT).
VAT compliance gaps are estimated at 43.9% of total tax obligations, equal to 2.6% of GDP.
“The main causes are taxpayer non-compliance, ineffective tax administration, and the dominance of the informal sector,” he explained.
CIT faces a similarly large compliance gap.
Indonesia loses an estimated IDR 160 trillion per year in CIT revenue, equivalent to 33% of total CIT liabilities or 1.1% of GDP.
Again, non-compliance and administrative inefficiencies are the root of the problem.
The World Bank also noted that the relatively high revenue threshold for Micro, Small, and Medium Enterprises (MSMEs), currently IDR 4.8 billion, contributes to low tax intake.
Taxpayers below this threshold pay a low final income tax rate of 0.5% and are not required to collect VAT.
Second, the issue of untapped “underground economy” potential has long been on the government’s radar.
This segment includes economic activities not officially recorded in national statistics, either because they are deliberately hidden to avoid taxes and regulations or because they are informal.
“The root of the low tax ratio problem lies in the fact that, for instance, in 2024, around 47% of Indonesia’s economy was outside the tax base. Taxes are only collected from the remaining 53%. Furthermore, generous tax incentives and the impact of COVID-19 have worsened the situation,” Dr. Winardi said.
As a comparison, he highlighted Georgia as a case study.
Despite lowering its tax rates, Georgia increased its tax-to-GDP ratio from 12% to 25% in 2008.
This success was achieved through several effective steps, such as establishing a clear mandate with defined goals and vision, securing high-level political commitment, simplifying the tax system and reducing exemptions to improve transparency, reforming consumption taxes, and overhauling tax administration through technological improvements, staff training, and legal enforcement.
He added that low tax revenue also hinders Indonesia’s short- and long-term economic growth.
In the short term, it narrows fiscal space, limiting the government’s ability to finance strategic development programs such as infrastructure, education, healthcare, and poverty alleviation.
As a result, critical projects may be delayed, scaled back, or face budget cuts, directly affecting public welfare.
In the long term, dependency on debt creates vulnerability to global economic shocks, increases the national debt burden, and further reduces fiscal flexibility.
Dr. Winardi proposed several policy recommendations to address the tax revenue issue, including mapping informal and underground economic activities, which have long been difficult to monitor.
Expanding the tax base and improving taxpayer compliance are also key to closing the revenue gap.
“Other solutions include wealth, coal production, and windfall taxes. Of course, these alternatives require in-depth studies, careful policymaking, and strong political will,” he concluded.
Author: Lintang
Editor: Gusti Grehenson
Image: Freepik
Post-editor: Lintang Andwyna