The World Bank notes that tax avoidance and evasion remain challenges for Indonesia’s tax system. It finds that some businesses can reduce their tax liabilities by exploiting regulatory gaps or through illegal practices.
These findings were published in July 2026, in a report entitled Indonesia: Unlocking Businesses' Tax Potential for Growth. The report was based on the 2023 World Bank Enterprise Survey (WBES), covering 2,995 formal firms across 38 provinces.
Tax Avoidance Perceptions
The survey reveals that 52% of corporate income taxpayers perceive tax avoidance as relatively easy to execute, a sentiment shared nearly consistently across business sizes and industries.
However, regional perceptions vary. Businesses operating in Sumatra, Eastern Indonesia, and Java, excluding Jakarta, consider tax avoidance difficult. Conversely, businesses in Jakarta, Kalimantan, Bali, and Nusa Tenggara perceive avoidance as rather easy.
Regarding value-added tax (VAT), 44% of respondents view tax avoidance as relatively easy, particularly within the industrial and services sectors. Small business owners and retailers generally report greater difficulty avoiding VAT.
The World Bank noted that regions where businesses considered income tax avoidance easy also tended to report similar perceptions regarding VAT, suggesting a need to improve tax supervision and compliance efforts in certain regions to boost state revenue.
The World Bank links these perceptions to tax authorities’ audit detection capabilities, law enforcement effectiveness, regulatory complexity, and businesses’ administrative capacity and financial conditions.
The World Bank also associates tax compliance with taxpayers’ level of trust in the tax authority, specifically the Directorate General of Taxes (DGT) under the Ministry of Finance.
Tax Evasion Risks
Furthermore, the World Bank estimates Indonesia’s tax evasion prevalence rate at 25% to 27%. In other words, roughly one in four formal businesses is suspected of reducing its tax liabilities through illegal practices. The estimate was derived using a double-list experiment methodology on the 2023 WBES data.
This practice is most pronounced among non-exporting businesses, those facing intense informal market competition, and those who view tax administration as a major business obstacle. The World Bank noted that such a practice results in lost potential state revenue.
The report also distinguishes between tax avoidance and tax evasion. Tax avoidance involves taking advantage of gaps within the tax rules without formally breaking the law. Tax evasion, by contrast, is illegal and may involve concealing income, falsifying documents, or manipulating financial statements to reduce tax liabilities.
The World Bank also underscores geographic disparities in tax morale. Taxpayers in Jakarta and Sumatra exhibit lower tax morale compared to those in regional Java and Eastern Indonesia.
Tax trust was also identified as an area for improvement. Businesses in Jakarta, Bali, and Nusa Tenggara reported lower levels of trust in the tax system than those in other regions. This circumstance was linked to perceived tax administrative burdens.
PKP Threshold Reforms
In the same report, the World Bank recommended reducing the annual turnover threshold for mandatory taxable entrepreneur (pengusaha kena pajak/PKP) registration from IDR 4.8 billion to IDR 500 million. According to the World Bank, Indonesia’s current threshold is among the highest in the world, equivalent to nearly 70 times the country’s GDP per capita.
This high ceiling shrinks the VAT net and encourages businesses to cap revenue below the PKP threshold or split operations into multiple entities to avoid VAT compliance. An analysis of administrative data from 2014 to 2017 found a concentration of businesses reporting turnover immediately below the PKP threshold. The pattern was particularly evident in wholesale and retail trade, where cash transactions and non-digital invoices remained common.
The World Bank views this situation as a VAT system inefficiency. Businesses purchasing goods or services from non-PKP suppliers cannot claim input VAT credits, which may increase production costs and create pricing distortions along the supply chain.
The proposed IDR 500 million PKP threshold is based on several considerations. The figure is relatively close to the IDR 600 million threshold that applied before the limit was raised to IDR 4.8 billion in 2014.
The 2023 WBES also shows that 66.4% of formal businesses generate annual turnover below IDR 1 billion, with nearly half reporting turnover below IDR 500 million. Thus, the World Bank suggests that lowering the threshold could broaden the tax base without requiring most micro businesses to pay tax.
The World Bank further recommends combining a lower PKP threshold with reduced VAT exemptions in selected sectors, such as extractive industries, machinery imports, and private healthcare and education services. These reforms are estimated to increase tax revenue by around 0.5% of GDP over the medium term, while strengthening taxpayer compliance and improving VAT system efficiency.
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