Minister of Finance Suahasil Nazara estimates that tax incentives in 2026 will amount to IDR 576.4 trillion, equivalent to 2.24% of gross domestic product (GDP). These incentives span a wide range, from tax exemptions and reductions to special tax rates for specific groups and sectors.
This figure offers an alternative lens on Indonesia’s tax ratio. Suahasil stated that the tax ratio sits around 10.1% of GDP. Mathematically factoring in uncollected revenue from fiscal incentives pushes the illustrative ratio to around 12.3%.
This calculation does not mean that the government actually collects tax revenue equivalent to 12.3% of GDP. The 12.3% figure illustrates the value of tax incentives added to recorded tax revenue. Tax foregone through incentive programs does not enter state coffers.
Tax incentives become central in such situations. From a revenue perspective, incentives reduce the amount of tax collected. From an economic policy perspective, however, the funds remain with households and businesses to support consumption, investment, production, or other economic activities.
The question therefore shifts from how much tax is forgone to how much economic benefit that tax expenditure generates.
Impact on the Tax Ratio
The tax ratio essentially measures tax revenue as a percentage of GDP. When tax incentives reduce potential revenue, the reported tax ratio will be lower than it would be without those incentives.
With tax incentives equivalent to 2.24% of GDP, the gap is significant. For instance, adding 2.24% to a tax ratio of 10.1% yields about 12.34%, or 12.3%.
Regardless, interpret this calculation carefully. Tax incentives are not forgone revenue in the sense that they lose all economic benefits. The government chooses not to collect certain taxes so that the funds remain in the economy. Suahasil explained that the incentives are intended to maintain purchasing power, fortify investment, and improve competitiveness.
Accordingly, the tax ratio cannot be the sole measure for assessing tax incentive policy. The ratio reflects tax revenue collected but does not directly capture the economic activity generated by tax incentives.
Not One-Size-Fits-All
The IDR 576.4 trillion represents the combined value of various forms of tax expenditure. The beneficiaries also vary, ranging from households and MSMEs to the manufacturing, agriculture, trade, construction, and services sectors. As a result, no single metric can assess all incentives.
Household incentives serve different purposes from investment tax holidays. VAT exemptions or incentives for specific goods operate differently from super tax deductions for research and development or training activities.
For example, the government-borne Article 21 income tax incentive in 2026 is part of a stimulus package for workers in eligible sectors. The provision covers sectors such as footwear, textiles and apparel, furniture, leather and leather goods, and tourism. The incentive applies to the January-December 2026 tax period.
In the housing sector, government-borne VAT encourages transactions involving landed houses and public housing subject to specific requirements. For investment, the government provides incentives such as tax holidays and tax allowances.
These differences in objectives mean each incentive must be evaluated based on its specific function.
Beyond Utilization
Tax expenditure results from the government’s decision not to collect certain taxes. The Ministry of Finance records tax expenditure as part of fiscal policy supporting public welfare, MSMEs, investment, and businesses.
Historical data indicates that tax expenditure has continued to increase. The Ministry of Finance estimated that tax expenditure would reach IDR 530.3 trillion in 2025, up 2.23% from 2024.
This increase makes evaluation increasingly vital. The more tax is forgone, the greater the need to ensure incentives generate measurable benefits.
For investment incentives, for instance, indicators could include additional investment, production capacity, employment, supply chain development, technology transfer, and research and development activities.
For consumption incentives, the government could assess changes in demand and production, as well as their impact on the targeted sectors.
Meanwhile, incentives for MSMEs should be assessed based on their impact on business continuity, business formalization, compliance, and businesses’ ability to grow.
Under this approach, success goes beyond the number of taxpayers using an incentive.
Digitalizing Oversight
Another issue arises when incentives become overly complex. Incentives with too many requirements can increase compliance costs and prevent some taxpayers who otherwise meet the criteria from utilizing them.
Conversely, loose eligibility criteria risk providing windfall tax benefits to economic activities that do not require fiscal support.
Thus, incentive design should consider three factors: who receives the incentive, the objective, and how to measure its benefits.
The digitalization of tax administration through the Coretax can support this process. Data integration allows the government to link taxpayer information with tax incentive use and compliance levels.
The data can also support compliance risk management by helping determine supervisory priorities, enabling oversight to go beyond monitoring after an incentive is granted and to target potentially risky utilization patterns.
Adapting Tax Incentives
Evaluating investment incentives is further complicated by changes in the international tax environment.
The global minimum tax under OECD/G20 Pillar Two limits the effectiveness of incentives that reduce multinational enterprises’ effective tax rates below the global minimum rate.
Indonesia needs to account for the Global Anti-Base Erosion (GloBE) Rules, including the qualified domestic minimum top-up tax (QDMTT).
These changes mean that tax holidays and reduced tax rates can no longer be assessed solely based on nominal tax rates. The government must also consider their impact on effective tax rates under the global minimum tax framework.
Instruments such as qualified refundable tax credits (QRTCs) are relevant in this context, as their characteristics differ from those of conventional tax rate reductions.
In other words, investment incentive policy needs to adapt to changes in the international tax system.
Measuring Effectiveness
The IDR 576.4 trillion figure shows the scale of fiscal resources the government allocates through tax policy. It also shows that tax incentives are no longer a minor component of Indonesia’s tax system. Nevertheless, the figure should not be viewed merely as forgone revenue.
On the one hand, the government forgoes potential revenue when it provides tax exemptions, reductions, or government-borne tax incentives. On the other hand, these policies are designed to give households and businesses greater room to spend or invest funds that would otherwise have been paid as taxes.
The debate over tax incentives should therefore not stop at a tax ratio of 10.1% or the illustrative figure of 12.3%. The more important question is whether the 2.24% of GDP in forgone revenue generates additional economic activity that can enhance the tax base over time.
If incentives encourage investment, increase production, expand employment, or support consumption, some of the benefits may return to the government through revenue generated by increased economic activity. Conversely, if an incentive does not substantially change its beneficiaries’ economic behavior, the government should reassess its fiscal costs.
At this point, tax administration reform and tax expenditure evaluation are inseparable. The government needs data to identify who receives each incentive, the value of the benefit, whether it has achieved its policy objective, and how it affects revenue in subsequent years.
With tax incentives reaching hundreds of trillions of rupiah, questions on their effectiveness are increasingly relevant. The tax ratio remains essential for measuring tax revenue capacity, but it needs to be considered alongside tax expenditure.
The difference between 10.1% and 12.3% in Suahasil’s illustration implies that reported tax revenue is also shaped by the government’s decisions about which taxes to collect and which taxes to forgo. The next challenge is to ensure that each incentive has a clear objective, appropriate beneficiaries, simple administration, and assessable, measurable outcomes.
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