The World Bank’s Criticism of Indonesia’s Taxes

https://provisio-id.com/provisioconsulting The World Bank’s Criticism of Indonesia’s Taxes, What’s Wrong? VAT Increase to 12% in 2025, Is it Effective to Increase Tax Ratio?

Indonesia is preparing to impose an increase in Value Added Tax (VAT) from 11% to 12% starting January 1, 2025. This policy is taken by the government to increase state revenue, especially through increasing the tax ratio. However, according to a World Bank report and several observers, the effectiveness of this policy is still questionable considering that Indonesia’s tax revenue to Gross Domestic Product (GDP) ratio is still relatively low compared to other countries.

Coordinating Minister for Economic Affairs Airlangga Hartarto stated that the VAT increase policy is designed to balance the principles of justice and mutual cooperation. The 12% rate is only imposed on premium goods and services consumed by the well-off. On the other hand, basic goods such as rice, meat, eggs, milk, and education, health, and financial services remain VAT-free. Some goods such as cooking oil and wheat flour will remain subject to 11% VAT.

World Bank Criticism: Indonesia’s Tax Ratio is Still Low

Despite the VAT rate hike, Indonesia’s tax ratio-which describes the contribution of tax revenue to GDP-is still far from the World Bank’s recommended standard. Currently, Indonesia’s tax ratio stands at around 10.4%, far below the 15% threshold considered essential to support sustainable economic growth and reduce poverty.

The World Bank said in its report that the low tax ratio reflects gaps in tax collection. The report shows that Indonesia’s tax potential has not been fully utilized, with a gap of about 6 percentage points compared to similar countries. According to the World Bank, this is due to low tax collection efficiency and complexity in the tax system.

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Tax Ratio and Gap with Other Countries

Deputy Finance Minister Suahasil Nazara explained that in theory, Indonesia should be able to achieve a tax ratio of 12.2% of GDP if tax expenditures (subsidies and tax exemptions) worth Rp445.5 trillion are optimized. However, the tax exemption policy that is intended to support the community’s economy makes this potential unattainable.

CNBC Indonesia compares several countries with similar economies such as Brazil, South Africa, and the Philippines have a higher tax ratio, with a positive difference between the VAT rate and the tax revenue ratio. This positive delta reflects the effectiveness of their tax system in collecting state revenue. Meanwhile, Indonesia has a negative delta of -0.6%, meaning that the VAT rate is higher than the contribution of tax revenue to GDP.

Indonesia’s VAT C Efficiency: Far Below Standard

Furthermore, the low contribution of VAT to tax revenue is also reflected in the declining C-Efficiency, which is the ratio between VAT revenue and final consumption. The lower this value, the greater the gap between potential VAT revenue and actual revenue.

In Indonesia, C-Efficiency decreased from an average of 52.8% in the 2016-2021 period to 44.5% during the Covid-19 pandemic. This figure is much lower than neighboring countries such as Malaysia and Thailand. This decline indicates that many potential VAT revenues have not been optimally utilized, either due to tax exemptions or weak collection systems.

Corporate Income Tax Problem: Unmaximal Revenue Potential

Apart from VAT, Corporate Income Tax (PPh) also faces similar problems. Between 2016 and 2021, Indonesia’s corporate income tax revenue averaged only 42% of its potential. Policies such as lower rates for companies with small turnover and discounted tax rates for public companies are among the main causes.

In 2020, the impact of the pandemic worsened the situation with a drop in Corporate Income Tax revenue of around 35%, adding to the gap between potential and realized revenue. In addition, tax compliance challenges and tax avoidance practices by companies contributed to the low Corporate Income Tax revenue. Many small companies that do not export and face stiff competition from the informal sector often consider tax administration as a major obstacle to their business, which encourages them to avoid tax obligations.

Read also: Economic Growth and Tax Ratio Targets in RPJMN 2025-2029 and RKP 2025

Steps Toward Tax Reform

Criticism of Indonesia’s low tax ratio and tax collection efficiency has prompted the government to undertake tax reform. Some steps that can be taken include