Jakarta. An analyst said Monday that Indonesia’s low tax ratio could stem from the sizable shadow economy and tax evasion by large corporations.

The government recently announced that it would pursue a tax ratio of 10.47 percent of gross domestic product (GDP) in 2026. This marks a slight increase from the 10.03 percent outlook set for this year.

However, the government appears to have struggled to reach beyond 10 percent, with the tax-to-GDP ratio only reaching 10.39 percent (2022), 10.31 percent (2023), and 10.08 percent (2024). Indonesia is lagging behind the average tax-to-GDP ratio of the rich nation club OECD, which stands at around 33.9 percent as of 2023.

Deni Friawan, a senior researcher at the economic think tank CSIS Indonesia, commented on why the tax-to-GDP ratio remained stagnant at around 10 percent.

“We just can’t force a bigger tax revenue within a short period of time because of our huge underground economy,” Deni told a news conference.

CSIS reported that 59 percent of the Indonesian workforce was working in the informal sector. This includes the street hawkers and ride-hailing drivers. According to CSIS, only 17 million out of the 145 million working-age population actively pay the taxes. Micro, small, and medium enterprises (MSMEs) largely drive the economy, but their literacy surrounding taxes remains lackluster.

“Tax compliance by large companies remains largely weak,” Deni said.

The think tank also fears resource-based companies are exploiting regulatory loopholes and political connections. Companies might also take advantage of transfer pricing. This is the practice of moving profits around from parent companies to subsidiaries and affiliates in other countries. However, many multinational corporations have used this tactic to shift profits out of the country into tax havens, not to mention the government's weak supervision of transfer pricing.

“Our fiscal framework also tends to be somewhat weak when it comes to exploitation of our natural resources. We mainly rely on royalties, not taxes,” Deni said.

Just last week, Finance Minister Sri Mulyani said that the government would take advantage of the digital taxation platform Coretax. The system came under fire upon launch early this year due to technical problems. Multilateral lender Asian Development Bank (ADB) recently unveiled a $500 million policy-based loan, with parts of the money meant to enhance the Coretax system. 

Indonesia aims to attract Rp 3,147.7 trillion (almost $194.8 billion) in state revenue next year. About Rp 2,357.7 trillion (around $145.9 billion) will come from taxes. The tax generation marks a 13.5 percent year-on-year (yoy) increase. Sri Mulyani denied that the double-digit increase meant the government would plan on imposing new taxes.

“We will follow the existing laws related to the taxes. So no, there will be no new taxes, but we will focus more on making internal reforms, including those related to the Coretax and exchange of data within the government,” Sri Mulyani told reporters Friday.

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