Jakarta. Indonesia’s long-running tax holiday incentive is facing renewed scrutiny as economists question its effectiveness in driving investment beyond government-backed downstream industries, even as authorities move to extend the policy into 2026.

Yusuf Rendy Manilet, a researcher at the Center of Reform on Economics (CORE) Indonesia, said the government has relied heavily on tax incentives over the past decade to attract capital, but their impact has been uneven and increasingly limited.

“This has become increasingly relevant given strong indications that tax incentives do not automatically drive investment, while non-fiscal factors often play an equally, if not more, significant role,” Yusuf said when contacted on Thursday.

He noted that tax holidays have supported industries aligned with the government’s downstreaming agenda, particularly nickel, as reflected in the strong growth of the basic metals sector in recent years. However, the policy has delivered far less impact on manufacturing investment outside of downstreaming, including labor-intensive industries.

As a result, Yusuf said efforts to promote broader industrialization capable of generating large-scale employment remain constrained, despite the wide range of tax incentives rolled out over the past decade.

Yusuf added that while tax holidays are a common investment tool globally, intensifying competition among countries to offer lower tax rates risks eroding state revenues, especially in developing economies such as Indonesia. This concern has fueled the global push to curb excessive tax competition through the global minimum tax framework.

Under the global minimum tax agreement brokered by the Organization for Economic Co-operation and Development (OECD), multinational companies are subject to a minimum effective tax rate of 15%. As a result, full tax holidays no longer guarantee zero taxation, since unpaid taxes can be collected by the country where a company’s headquarters is located.

Botax Consulting Indonesia tax consultant Raden Agus Suparman said the new global rules have significantly reduced the appeal of tax holidays for foreign investors. If Indonesia does not impose tax, he said, the investor’s home country will instead collect the 15% levy.

To maintain competitiveness, Raden suggested Indonesia shift toward super tax deductions, particularly for vocational programs and research and development (R&D). He proposed expanding the R&D deduction beyond the current 100% to as much as 250% to directly stimulate innovation and long-term growth.

Under such a scheme, companies conducting R&D in Indonesia could substantially reduce their taxable income, even if accounting profits remain strong, he said.

Concerns over forgone revenue were echoed by Fajry Akbar, a tax analyst at the Center for Indonesia Taxation Analysis (CITA), who warned that aggressive tax incentives can come at the expense of funding for public services such as education, healthcare, and infrastructure.

He said the global minimum tax was intended to encourage countries to compete on fundamentals such as infrastructure quality, human capital, and regulatory certainty, rather than tax breaks alone.

Still, Fajry acknowledged that tax incentives, including tax holidays, may remain relevant if adjusted to fit the new global framework. For multinational companies, he pointed to alternative instruments such as Qualified Refundable Tax Credits (QRTC), citing Singapore’s Refundable Investment Credit (RIC) as a potential model Indonesia could consider.

Tax Holiday to Continue Through 2026
Despite the debate, the government has signaled that the tax holiday policy will not be discontinued. Febrio Nathan Kacaribu, director general for economic and fiscal strategy at the Finance Ministry, said the government is preparing a new regulation to extend the incentive through the end of 2026.

The new rule will replace Finance Ministry Regulation (PMK) No. 69/2024, which limits the current tax holiday scheme to December 2025. The revised framework will also align tax holidays with the global minimum tax regime.

Febrio said granting a full tax exemption without adjustment would effectively shift tax payments overseas. “If we give a full tax holiday, that means the company will pay the 15% tax to its home country. That would be equivalent to subsidizing another country’s state budget,” he said.

While the government is still finalizing a broader redesign of its tax incentive framework, Febrio stressed that tax holidays will continue during the transition period.

“For now, the tax holiday regulation is being extended, and the scheme for 2026 will remain in place,” he said.