The Ministry of Finance, through the Directorate General of Economic and Fiscal Strategy, regularly publishes the Tax Expenditure Report as part of fiscal transparency in accordance with the Fiscal Transparency Code introduced by the International Monetary Fund (IMF).
According to the report, Indonesia’s tax expenditure has increased over the past five years. In 2021, tax expenditure reached IDR 299.1 trillion, equivalent to 1.76% of gross domestic product (GDP), up from IDR 241.6 trillion in 2020. Incentives provided under the National Economic Recovery Program partly drove the increase.
In 2022, tax expenditure increased to IDR 323.5 trillion, or 1.65% of GDP. It rose again to IDR 362.5 trillion, or 1.73% of GDP, in 2023 and IDR 400.1 trillion, or 1.81% of GDP, in 2024. The 2024 figure was approximately 11% higher than the previous year.
The government also projected tax expenditure for 2025 at between IDR 515 trillion and IDR 530.3 trillion. The former Head of the Fiscal Policy Agency, Febrio Kacaribu, described tax expenditure as a fiscal policy instrument that complements government spending.
The increase in tax expenditure needs assessment in terms of its utilization and impact, particularly on investment.
Most Popular Tax Incentives
Utilization of tax incentives varies across incentives. According to the 2024 Tax Expenditure Report, the five incentives contributing the largest shares of total tax expenditure were not incentives specifically aimed at large-scale investors.
First, the exemption from the obligation to register as a taxable entrepreneur (pengusaha kena pajak/PKP) for MSMEs accounted for 24.4% of VAT and luxury-goods sales tax expenditure.
Second, the income tax exemption on dividends earned by resident taxpayers and reinvested domestically accounted for 23.7% of income tax expenditure.
Third, the final income tax regime for MSMEs under Government Regulation Number 55 of 2022 accounted for 19.6% of income tax expenditure.
Fourth, the VAT exemption for necessities accounted for 17.7% of VAT expenditure.
Fifth, exemptions for specific income related to the Social Security Administration Agency (Badan Penyelenggara Jaminan Sosial/BPJS) accounted for 14.2% of income tax expenditure.
By contrast, the utilization of incentives specifically intended to attract large-scale investment remains below target. Neilmaldrin Noor, Director of Tax Education, Services, and Public Relations at the Directorate General of Taxes, said investment realized through the tax holiday for pioneer industries reached IDR 153.20 trillion as of the end of 2022. This figure was significantly below the IDR 1,639.89 trillion target under Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 35 of 2018 and PMK Number 130 of 2020.
A similar situation occurred with the tax allowance for specific priority industries. Realized investment stood at IDR 4.34 trillion, compared with a target of IDR 58.58 trillion.
A tax practitioner also noted that tax holidays are not the primary factor in investment decisions, as taxes are generally expected to remain neutral.
These figures show that the most widely used tax incentives relate to MSMEs, consumption, and public welfare. Meanwhile, the utilization of incentives aimed at large-scale investment remains relatively limited.
Indonesia’s Tax Expenditure in ASEAN
Indonesia’s tax expenditure-to-GDP ratio is relatively moderate compared with several ASEAN countries. A study presented at the Addis Tax Initiative forum estimated Cambodia’s tax expenditure at about 6% of GDP. Indonesia’s ratio stood at around 1.6%, while Vietnam and the Philippines each stood at around 1% of GDP.
The study also identified the business environment as a primary factor determining the location of foreign direct investment in ASEAN, alongside tax incentives.
In Indonesia, realized investment reached IDR 1,418.9 trillion in 2023, up 17.5% from IDR 1,207.2 trillion in 2022. In the same year, tax expenditure for investment purposes amounted to approximately IDR 61.2 trillion, or 16.9% of total tax expenditure.
These figures indicate that tax expenditure alone does not drive investment growth. Other factors, such as macroeconomic stability, downstream processing of natural resources, and regulatory certainty, may also influence investment decisions.
The comparison with Cambodia also shows that a higher tax expenditure-to-GDP ratio does not automatically result in a corresponding increase in investment. Therefore, the scale of tax incentives cannot be used as the sole indicator of a country’s investment attractiveness.
Conclusion
Incentives for MSMEs, consumption, and public welfare largely drive Indonesia's rising tax expenditure. At the same time, the realization of tax holidays and tax allowances remains well below set targets.
Tax incentives are not the only factors affecting investment. Macroeconomic conditions, market size, infrastructure, raw material availability, workforce quality, and regulatory certainty also factor into investment decisions.
The government should regularly evaluate the effectiveness of tax holidays and tax allowances using a cost-benefit analysis approach. The evaluation should measure the additional investment generated against the forgone tax revenue.
Monitoring of incentive recipients should also be improved, particularly on investment realization and job creation, which are part of the commitments undertaken by incentive recipients.
Transparency in tax expenditure can provide a basis for enforcing sunset clauses and evaluating incentives in place for an extended period. Moreover, policymakers can maintain incentives for MSMEs and households while evaluating their impact on the tax base and economic activity.
Measurable evaluation can direct tax expenditure policy toward incentives that deliver clear and accountable economic benefits.
Legal References
- Law of the Republic of Indonesia Number 25 of 2007 concerning Investments.
- Law of the Republic of Indonesia Number 7 of 2021 concerning Harmonization of Tax Regulations.
- Government Regulation Number 55 of 2022 concerning Adjustments to Income Tax Provisions.
- Government Regulation Number 78 of 2019 concerning Income Tax Incentives for Investment in Specific Business Sectors and/or Regions.
- Minister of Finance Regulation Number 130/PMK.010/2020 concerning the Provision of Corporate Income Tax Reduction.
- Minister of Finance Regulation Number 96/PMK.010/2020 concerning Procedures for Providing Net Income Reduction for New Investment or Business Expansion in Specific Business Sectors and/or Regions.
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