Indonesia’s tax expenditure, particularly in the financial sector, is significant and requires a
comprehensive review. In 2022, the country’s tax expenditure reached 1.65% of GDP, with the financial
sector accounting for 0.23%, or 14% of the total tax expenditure. This is concerning given Indonesia’s
low tax-to-GDP ratio of 10.9% in 2021, one of the lowest in Asia. The declining ratio, down from 13% in
2008, highlights the need to reassess tax concessions to enhance fiscal sustainability.
Tax concessions are intended to stimulate economic activity, but they contribute to Indonesia’s
shallow financial sector. These incentives are designed to encourage investment and economic
growth, serving as alternatives to direct spending for poverty alleviation and inequality reduction.
However, Indonesia’s relatively low tax revenues hinder financial sector development, unlike developed
countries where the financial sector contributes significantly to government income. The low taxation
on property transactions encourages wealth accumulation in property rather than financial assets,
further limiting sectoral expansion.
A lack of transparency and oversight in tax concessions raises concerns about their effectiveness
and fairness. Many tax concessions, whether explicit or implicit, are not subject to the same scrutiny as
direct expenditures. Without proper evaluation, their efficiency and alignment with intended objectives
remain questionable. Additionally, simplified tax policies, such as the final 20% tax on savings interest
above IDR7.5 million, are regressive and disproportionately impact lower-income groups.
Reforming tax policies in banking and capital markets can improve progressivity and
efficiency. Banking products are mostly VAT-exempt, but a tiered tax system for deposit interest
could enhance fairness by applying progressive rates. Similarly, capital market tax policies could be
revised to include all capital gains, whether from stocks, bonds, or property, under a marginal tax rate.
Implementing tiered taxation based on asset value and investment duration could encourage long-term
investments while ensuring a more equitable tax system.
A comprehensive review of tax expenditures will help level the playing field between sectors, fostering
a more competitive and resilient economy. By ensuring that tax policies do not disproportionately favor
certain industries, all sectors can contribute equitably to national development. This approach balances
fairness by addressing regressive elements, enhances efficiency by minimizing market distortions, and
considers administrative feasibility to facilitate practical implementation. Ultimately, a well-designed
tax policy will recover forgone revenues effectively and align tax incentives with direct spending to
maximize their value to the economy.
Download Full Paper Here: Policy Paper 5_Leveling Taxation Playing Field