Indonesia - Unlocking Businesses’ Tax Potential for Growth

Overview & Synopsis

Indonesia has made remarkable progress in recent decades, achieving upper-middle income status in 2023. This success has been anchored in prudent fiscal management, low and stable debt levels, and policies that have supported growth and job creation. Looking ahead, the country has set a bold ambition: to reach high-income status by 2045, coinciding with the centenary of independence. Achieving this milestone will require higher and more inclusive growth, sustained at over 6 percent annually. Strengthening fiscal space, while safeguarding macroeconomic stability, will enable Indonesia to finance the investments needed in infrastructure, human capital, and social protection. The report highlights major opportunities in Corporate Income Tax (CIT) and Value-Added Tax (VAT), the two largest revenue sources. It emphasizes building existing policies to ensure revenues are collected effectively and fairly. Going forward, Indonesia can raise an additional 6 percent of gross domestic product (GDP) in revenue from CIT and VAT. This will require addressing both policy design factors - such as exemptions, preferential treatments, and thresholds - and compliance challenges, including administrative complexity, enforcement, and incentives for formalization. Mobilizing even part of this revenue can fund substantial increases in investment in schools, hospitals, transport, and infrastructure - investments that directly support Vision 2045. The recommended tax measures can mobilize an indicative additional 2.5 percent of GDP in revenue - sufficient to fully finance these programs while remaining within fiscal rules.