Manufacturing plays a pivotal role in the national economy. Beyond driving gross domestic product (GDP), the sector creates a multiplier effect across interconnected industries, including metals, chemicals, textiles, logistics, and trade. It is also the nation’s largest employer and the main contributor to non-oil and gas export value added.
A prolonged manufacturing Purchasing Managers' Index (PMI) contraction risks broader economic fallout. Reduced factory output typically leads to scaled-back investment, weaker household consumption due to income loss, and slowing export activity.
Compounding this pressure is a steep rise in operating costs. Input cost inflation surged to its highest level since September 2013. To protect operating margins, manufacturers raised selling prices at the fastest rate in over a decade. Softening demand, both domestically and from export markets, primarily drove the downturn and forced businesses to scale back production, curb raw material purchases, and cut headcount.
The closure of PT Sri Rejeki Isman (Sritex) in early 2025 and widespread layoffs across the textile industry illustrate how structural pressures in manufacturing can lead to job losses. Such disruptions suggest that industrial weakness impacts not only businesses, but regional economic stability at large.
From a fiscal standpoint, a sluggish manufacturing sector threatens tax collection. Indonesia’s tax ratio historically trails Asia-Pacific and OECD member countries' averages. World Bank Data shows that Indonesia’s tax-to-GDP ratio stood at 9.1% in 2021, lagging behind Cambodia (18.0%), the Philippines (15.2%), Thailand (14.7%), and Malaysia (11.9%).
Sustained manufacturing stress impacts multiple tax revenue streams. Declining corporate profits directly reduce corporate income tax returns, workforce reductions and lower employee compensation curb payroll Article 21 income tax, and slowing domestic goods transactions depress value-added tax. If these conditions persist, expanding the national tax ratio will become increasingly challenging as the tax gap risks widening.
To revitalize the manufacturing sector, targeted fiscal measures are required. First, the government needs to provide tailored tax incentives to labor-intensive industries facing demand slumps, such as textiles, footwear, and furniture. Extending or broadening government-borne Article 21 income tax with regular evaluations can offer direct relief to businesses.
Second, tax incentives in special economic zones (SEZs) and export-oriented industrial areas can be optimized by leveraging tax holiday and tax allowance schemes for high-value-added manufacturing investments. Such a policy would help maintain Indonesia’s competitiveness in attracting global investment.
Third, the government could review anti-dumping and safeguard duties to protect domestic producers from low-cost import surges without disrupting downstream raw material supply chains.
Fourth, tax administration should be streamlined, including further improvements to the Coretax system, to prevent unnecessary compliance burdens for businesses. More efficient tax administration helps companies preserve their cash flow while supporting greater tax compliance.
Finally, fiscal incentives need to be aligned with industrial downstreaming and the domestic supply chain, such as offering gross income deductions for capital investments in machinery, digitization, and production automation. These measures would help ensure that Indonesia’s manufacturing competitiveness is supported not only by short-term incentives but also by productivity gains.
The decline in Indonesia’s manufacturing without strategic fiscal intervention, risks surrounding deindustrialization, tax revenue shortfalls, and a widening tax gap will escalate. Prioritizing manufacturing resilience should therefore remain vital, both to improve Indonesia’s industrial competitiveness and to broaden the country’s tax base amid growing economic competition across the region.
Also Read:
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