How Indonesia Plans to Increase Its Tax-to-GDP Ratio

Indonesia is moving to overhaul its tax collection system as the government seeks to raise its tax-to-GDP ratio—currently among the lowest in Southeast Asia—to fund ambitious infrastructure and social programs. President Prabowo Subianto’s administration plans to establish a dedicated revenue agency to streamline administration and curb tax avoidance, aiming to bring the ratio closer to the 15% threshold recommended by the International Monetary Fund.

The Strategy Behind Indonesia’s New Revenue Agency

The Indonesian government is transitioning toward the creation of a specialized tax agency, separating the tax and customs functions from the current Ministry of Finance. According to statements from the Coordinating Ministry for Economic Affairs, this institutional restructuring is designed to provide the new body with greater autonomy in enforcement and policy implementation. By decoupling revenue collection from the broader fiscal management of the ministry, officials intend to reduce bureaucratic friction and improve the efficiency of tax audits.

The current tax-to-GDP ratio in Indonesia has hovered around 10% in recent years, significantly trailing regional peers like Vietnam and Thailand, which often record ratios between 14% and 17%. The Ministry of Finance has noted that expanding the tax base is a primary objective, particularly by targeting the "shadow economy" and ensuring digital platforms and high-net-worth individuals contribute a larger share to the national treasury.

Addressing the Informal Economy and Digital Taxation

A significant portion of Indonesia’s economic activity remains outside the formal tax net. To address this, the government is intensifying its use of the Core Tax Administration System (CTAS). This digital infrastructure, currently being rolled out by the Directorate General of Taxes, aims to digitize the entire filing and payment process.

The initiative is not merely about enforcement but also about compliance. By integrating data from banking and social security records, the government plans to automate tax assessments. According to the Asian Development Bank, improvements in digital compliance are essential for emerging markets to capture revenue from the rapidly expanding e-commerce sector. The government’s focus remains on shifting millions of informal workers and small-to-medium enterprises (SMEs) into a formal electronic filing system, which they argue will lower the cost of compliance for taxpayers.

Fiscal Stakes and Future Budgetary Needs

The urgency to raise revenue is driven by a series of long-term fiscal commitments. President Prabowo has emphasized the need for increased spending on the "Free Nutritious Meal" program, alongside ongoing investments in the new capital city, Nusantara.

With the government facing a constitutional mandate to allocate 20% of the state budget to education, fiscal space is limited. The World Bank has previously cautioned that without a structural increase in domestic revenue, Indonesia may struggle to maintain its debt-to-GDP ratio while simultaneously funding these public services. The administration aims to balance these demands by broadening the tax base rather than simply raising rates, a move intended to avoid stifling domestic consumption, which remains the primary engine of the Indonesian economy.

Key Considerations for Tax Reform

• Institutional Autonomy: The transition to a dedicated revenue agency seeks to enhance enforcement capabilities independent of general fiscal policy.
• Digital Transformation: The Core Tax Administration System (CTAS) is the primary tool for reducing manual errors and increasing transparency in taxpayer data.
• Regional Comparison: Indonesia’s current ~10% ratio remains a point of concern for international credit rating agencies, which look for higher revenue mobilization to ensure long-term debt sustainability.
• Policy Focus: Rather than increasing the Value Added Tax (VAT) or corporate income tax rates, the current strategy emphasizes improved collection efficiency and the formalization of the informal sector.