Measuring the Tax Gap to Set Realistic Revenue Targets

The Organization for Economic Co-operation and Development (OECD) defines the tax gap as the difference between the total tax theoretically owed and the amount actually collected. The Ministry of Finance uses this metric to gauge taxpayer compliance and assess administrative efficiency.

Using its Revenue Administration Gap Analysis Program (RA-GAP) method, the International Monetary Fund (IMF) breaks the tax gap down into two distinct components. First, the compliance gap, which refers to revenue losses stemming from non-compliance, tax avoidance, and tax evasion. Second, the policy gap, which refers to potential revenue forgone due to specific policies, such as preferential rates, statutory thresholds, or tax exemptions.

Measuring the tax gap is essential for anchoring tax revenue targets to actionable economic potential. It also provides a baseline for evaluating an economy’s voluntary compliance rate (VCR).

Without tax gap estimates, budget targets risk being driven by spending needs rather than underlying collection capacity. Relying on revenue goals calculated purely from expenditure demands without evaluating actual taxpayer capacity or addressable revenue leaks creates operational pressure on tax authorities.

How Indonesia Sets Its Tax Target

Indonesia has yet to systematically incorporate tax gap calculations into its revenue forecasting, state budget targeting, or tax compliance strategies. State budget targets are developed through the Macroeconomic Framework and Fiscal Policy Principles (Kerangka Ekonomi Makro dan Pokok-Pokok Kebijakan Fiskal/KEM-PPKF), a document produced by the Fiscal Policy Agency (Badan Kebijakan Fiskal/BKF) based on macroeconomic projections, historical collection performance, and medium-term national development goals.

One metric utilized in this framework is tax buoyancy, which measures the tax revenue growth relative to nominal economic growth.

In formulating the 2027 state budget bill, the government projects real economic growth of 6% and inflation of 2.5%, yielding an estimated nominal economic growth rate (real economic growth plus inflation) of 8.5%. Against this backdrop, the government targets tax revenue at IDR 2,591.4 trillion in the 2027 state budget bill, a 12.1% increase over the 2026 outlook.

Tax buoyancy is calculated by dividing tax revenue growth by nominal economic growth. On this basis, the implied tax buoyancy for 2027 is 1.42%. In other words, every 1% increase in nominal economic growth is expected to generate approximately 1.42% growth in tax revenue.

However, this approach fails to specify where the necessary additional revenue will come from, particularly the portion expected to be generated by closing the compliance gap.

Indonesia’s tax buoyancy surged past 2 in 2021 and 2022, primarily driven by a global commodity boom and the voluntary disclosure program (program pengungkapan sukarela/PPS), also known as tax amnesty volume II. Yet tax buoyancy fell to 0.88 in 2023, dropped to 0.60 in 2024, and contracted to -0.12 in 2025.

These sharp swings show that tax revenue growth does not always mirror economic expansion. Consequently, tax buoyancy-based targets must be augmented by tax gap mapping to pinpoint addressable revenue streams.

Indonesia’s Tax Gap

As the Directorate General of Taxes (DGT) does not regularly publish official tax gap figures, estimates rely largely on independent academic research and multilateral institutions.

According to a World Bank report, Estimating VAT and CIT Gaps in Indonesia (2025), the combined value-added tax (VAT) and corporate income tax (CIT) gap averaged 6.4% of GDP between 2016 and 2021. The figure was equivalent to an estimated IDR 944 trillion in annual potential revenue.

The tax gap breaks down into:

• Compliance gap at 3.7% of GDP, or equal to around IDR 548 trillion, driven by non-compliance, including tax avoidance and evasion.
• Policy gap at 2.7% of GDP, or equal to IDR 396 trillion, arising from government policies that reduce potential revenue, particularly fiscal incentives, tax exemptions, and other tax incentives.

The sizeable compliance gap indicates some potential revenue remains outside the tax net. One contributing factor is economic activity that tax administrations have yet to fully capture.

Meanwhile, as noted in the OECD’s Tax Administration 2024: Comparative Information on OECD and Other Advanced and Emerging Economies report, the policy gap tracks tax revenue forgone through tax legislative design. The gap may include deliberate tax expenditures, such as tax credits introduced to achieve specific policy objectives, as well as unintended tax expenditures.

Indonesia’s growing policy gap is visible in official Ministry of Finance Tax Expenditure Reports. Tax expenditures encompass various incentives that reduce state revenue.

Source: Ministry of Finance Tax Expenditure Report.

Indonesia also struggles with low VAT collection efficiency. The World Bank’s Estimating VAT and CIT Gaps in Indonesia (2025) report found that Indonesia’s VAT C-efficiency stood at 52.8% in 2021, meaning actual VAT receipts reached only about half of their theoretical potential. By comparison, Thailand achieved a C-efficiency of 76.7% in the same year.

This relatively low efficiency is partly due to VAT exemptions on goods and services, including necessities, education, and healthcare, as well as the turnover threshold for businesses required to register as taxable entrepreneurs (pengusaha kena pajak/PKP).

The issue is also reflected in Indonesia’s tax ratio. According to the DGT annual report, the tax ratio slid from 10.38% in 2022 to 10.31% in 2023 and 10.08% in 2024, before falling further to 9.31% in 2025.

The 2027 State Budget Revenue Target

Illustration.

Under the 2027 KEM-PPKF, the government targets state revenue between 12.01% and 12.4% of GDP while capping the state budget deficit at 2.4% of GDP, equivalent to IDR 671.2 trillion.

Total tax receipts are projected to reach IDR 2,908 trillion in the 2027 state budget bill, up 10.5% from the 2026 outlook of IDR 2,631.4 trillion. Meanwhile, tax revenue is targeted at IDR 2,591.4 trillion, representing a 12.1% increase from the 2026 projection.

Achieving these aggressive targets requires tax gap mapping by sector and tax type. Without a mapping, additional revenue may be extracted disproportionately from registered and compliant taxpayers rather than through a tax base expansion.

Continued reliance on existing taxpayers may also intensify audits, collection measures, and tax adjustments. Without corresponding efforts to broaden the tax base, this approach could affect corporate cash flows and investment decisions.

Pressure on taxpayers could also affect capital expenditure (CAPEX), hiring, and working capital, especially if tax refund processing delays persist.

To prevent these distortions, the 2027 revenue targets must explicitly define where additional revenue will be generated, including how much of the compliance and policy gaps might be closed. Therefore, the target will be more measurable while reducing reliance on intensified enforcement against existing taxpayers.

How Other Jurisdictions Measure the Tax Gap

Countries worldwide rely on tax gap analyses to shape revenue strategies and manage taxpayer compliance. According to the OECD’s Tax Administration 2024: Comparative Information on OECD and Other Advanced and Emerging Economies, 89% of tax authorities employ top-down macroeconomic modeling, while 57% use bottom-up approaches based on micro-data and audit findings.

United States

The United States regularly estimates gross tax gaps, net tax gaps, and VCR through the Internal Revenue Service (IRS). For fiscal year 2022, the IRS estimated a gross tax gap of USD 696 billion, with the VCR holding steady at around 85% over the past three decades.

The gross tax gap consisted of an underreporting gap of USD 539 billion, an underpayment gap of USD 94 billion, and a non-filing gap of USD 63 billion. The IRS calculates the underreporting component using the National Research Program (NRP), a random taxpayer sample audit.

The IRS also applies detection-controlled estimation (DCE), an econometric regression-based model that uses random audit results to estimate income that may remain undetected during audits. These methodologies help the IRS estimate lost revenue and evaluate the effectiveness of tax enforcement.

Australia

The Australian Taxation Office (ATO) establishes a tax gap report across 15 tax categories, covering transaction taxes, such as goods and services tax (GST), fuel and tobacco excises, and income taxes, including corporate, individual, and fringe benefits.

For 2022–2023, the ATO estimated a net tax gap of AUD 58.2 billion, equivalent to 9.1% of the estimated AUD 640.5 billion in theoretical tax liabilities. Small business income tax accounted for the largest gap at 17.4%, followed by individual income tax at 6.2% and GST at 9.1%.

Measuring the gap by tax type and taxpayer segment enables the ATO to target compliance and evaluate policy effectiveness based on reductions in the tax gap.

Singapore and Malaysia

Singapore applies risk-based compliance management through the Inland Revenue Authority of Singapore (IRAS) and directs enforcement resources toward taxpayers based on their risk profiles.

IRAS also operates the Tax Governance Framework (TGF) and Tax Risk Management and Control Framework for Corporate Income Tax (CTRM). Companies eligible for internal tax controls may benefit from fewer audits and related to voluntary disclosure.

Malaysia’s Inland Revenue Board (Lembaga Hasil Dalam Negeri/LHDN) similarly uses risk analysis to determine audit priorities and penalties. Although LHDN does not publish a tax gap report as extensively as Australia, its approach emphasizes risk management and long-term compliance.

Indonesia’s Effort to Reduce the Tax Gap

Indonesia has taken important steps to address its tax gap through administrative modernization and compliance risk management. The DGT introduced the Core Tax Administration System, commonly known as Coretax, to unify tax data and enable end-to-end digital processing.

Coretax features pre-filled tax returns driven by third-party data matching and streamlined refund processing. The data integration is expected to reduce reporting errors and enhance the DGT’s ability to identify non-compliance.

In tandem, the DGT deploys compliance risk management (CRM) to segment taxpayers by risk level, offering simplified services to low-risk taxpayers while directing audit and collection resources toward high-risk taxpayers.

Additionally, integrating the national identification number (nomor induk kependudukan/NIK) as the taxpayer identification number (nomor pokok wajib pajak/NPWP) expands the tax database to help identify unregistered taxpayers.

Threshold Issues

One policy issue concerns the turnover threshold for mandatory PKP registration. Under Government Regulation Number 55 of 2022, businesses are exempt from registering as PKP if their annual turnover remains below IDR 4.8 billion. This threshold is six times higher than the OECD countries’ average. Businesses below the threshold are exempt from collecting VAT and can opt for the 0.5% final income tax under applicable regulations.

This high ceiling could create a bunching effect, where businesses deliberately cap reported revenue to avoid VAT obligations, or engage in firm splitting, where they divide operations across multiple entities to stay under the threshold.

Although the Government Regulation Number 20 of 2026 places time limits on using final tax rates, the fundamental PKP registration threshold requires evaluation as it relates to the VAT base and integrates small businesses into the formal tax system.

Dispute Backlog

Lacking a consistent tax gap metric to justify revenue targets can over-pressurize field audits and tax adjustments. According to the DGT’s 2025 Performance Report, tax dispute backlogs reached 64,625 cases involving IDR 176.16 trillion in contested assessments.

The Tax Court received 12,238 new cases in 2025, a 3.4% year-over-year increase. Meanwhile, the DGT’s dispute win rate dropped to 37.50% in 2025, falling below its 46% target and down from 44.14% in 2024.

These data point to the need to improve the quality of tax audits and adjustments. Adjustments lacking a solid legal basis or evidence drive up disputes and impose administrative costs on both the state and taxpayers.

Rethinking How State Budget Targets Are Set

Tax revenue targets should combine macroeconomic projections with tax gap measurement. Tax buoyancy can remain an indicator, but it should be complemented by an assessment of where additional revenue is expected to come from.

First, the government should consider using the VCR as a key performance indicator (KPI) for the DGT rather than relying on nominal revenue targets. Their performance would then be measured not solely by the amount of revenue collected by year-end, but by the percentage of tax paid voluntarily compared to the true tax liability. 

This approach draws on the IRS model, under which the VCR has remained at around 85%.  It could shift enforcement away from a cops-and-robbers approach and toward improving voluntary compliance, while reducing non-risk-based audits and the potential for disputes before the Tax Court.

Second, the government should adopt both top-down and bottom-up methodologies for measuring the tax gap. A top-down approach could apply the IMF’s RA-GAP methodology, using household consumption data to estimate the VAT gap.

Meanwhile, a bottom-up approach could incorporate DCE. Integrating both approaches with Coretax could help the government estimate the net tax gap and determine a realistic amount of annual collectible additional revenue.

Third, enforcement resources should be directed toward the shadow economy. DCE results could be used to estimate the non-filing gap and identify economic activity that remains outside the tax system. By using these indicators as a risk map, enforcement efforts could focus on larger potential tax gaps rather than repeatedly targeting compliant taxpayers. Such an approach could also reduce pressure on corporate cash flow and capital expenditure while expanding the tax base.

Targeting IDR 2,591.4 trillion in tax revenue for the 2027 state budget requires a granular breakdown of source revenues. The government must separate yields expected from baseline economic growth, policy gap reductions, and compliance gap closure.

Reducing the policy gap could involve evaluating tax expenditures, estimated at IDR 530.3 trillion. Meanwhile, efforts to close the compliance gap should be based on detailed mapping by sector, tax type, and taxpayer segment with high non-compliance risk.

This kind of approach would make revenue targets more measurable and allow the DGT’s performance to be assessed by its ability to narrow the tax gap rather than merely by whether it achieves a nominal collection target. With these data, the government could set revenue targets based on available potential and adopt a more effective strategy to close the tax gap.

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