New Direction for 2027 Tax Reform: Ministry of Finance Strengthens Administration, Evaluates Incentives, and Expands Tax Base

The Ministry of Finance has established three tax reform priorities to ensure the macroeconomic assumption targets in the State Budget (APBN) can be achieved amid global economic uncertainty. This condition is influenced by various pressures, ranging from geopolitical tensions, trade wars, and commodity price volatility, to high global interest rates that can impact economic activity, tax revenue, as well as the burden of subsidies and APBN financing costs. The 2027 Draft State Budget (RAPBN) targets an economic growth of 6% with a deficit target of 2.4%, making tax reform a priority to support economic growth while maintaining fiscal discipline.

The first priority is the modernization of administration and the facilitation of compliance through Coretax to improve the taxpayer experience. This includes easing the processes of registration, reporting, payment, and the resolution of administrative issues. The second priority involves expanding the tax base and strengthening compliance through the use of administrative and third-party data combined with risk-based supervision to identify tax gaps, accompanied by an evaluation of tax incentive policies. Meanwhile, the third priority is directed at building a fair, predictable, and adaptive tax system through strengthening cross-border tax cooperation, legal certainty, dispute resolution, and the utilization of artificial intelligence (AI) and big data to optimize potential state revenue. This reform is also driven by collaboration between the Directorate General of Taxes, the Directorate General of Economic and Fiscal Strategy, academics, and researchers, prioritizing evidence-based policies.

The modernization of tax administration through Coretax is also followed by an evaluation of tax incentive schemes to ensure they remain aligned with developments in international tax regulations.

The Indonesian government is re-evaluating the provision schemes for tax holiday and tax allowance incentives to align them with the implementation of the Global Minimum Tax (GMT), which sets a minimum effective tax rate of 15%. An Expert Staff member at the Ministry of Finance explained that the increase in Indonesia's tax expenditure, from around Rp293 trillion in 2021 to an estimated Rp564 trillion in 2026, is a point of concern when evaluating whether the incentives provided to industries are accurately targeted. The government needs to maintain a balance between efforts to attract productive investments and safeguard state revenue amidst the changing global tax landscape.

As part of these adjustments, the Ministry of Finance is considering alternative incentive schemes such as cash credits or tax credits that are more compatible with the GMT structure. The Ministry also highlighted the need for incentive designs that are relevant to changes in business structures and the development of the digital economy. Going forward, tax incentive policies will be based on four principles: international alignment, strategic relevance, the 3T principle (Timely, Targeted, Temporary), and continuous evaluation to ensure the economic benefits of each incentive.

In addition to evaluating tax incentive schemes, the government also faces challenges in encouraging informal business actors to enter the formal economy and tax system.

Efforts to expand the tax base by formalizing the informal sector still face obstacles in the form of institutional quality and a crisis of public trust in state administrators. An economic observer from Universitas Gadjah Mada highlighted the massive role of MSMEs in the domestic economy. MSMEs reportedly contribute around 60% to the Gross Domestic Product (GDP) and absorb up to 97% of the national workforce, yet the majority still operate informally. This issue is further complicated by overlapping MSME regulations and differing definitions based on assets, turnover, and the number of employees. Using a coordination game approach, the government needs to take the first step by providing optimal public services and incentives to encourage business actors to enter the formal system and improve tax compliance.

Furthermore, the strengthening of the Single Identity Number (SIN) and data interconnection are also part of these efforts. Data interconnection can cover vehicle ownership data, land registration or certificates, and beneficial ownership data. However, these integration efforts still face hurdles in the form of weak inter-ministerial coordination and a fragmented bureaucratic system. Therefore, the design of policy mechanisms needs to focus on improving the quality of institutions and information, as well as building trust at the national level.

In conclusion, these three developments indicate that tax reform is entering a phase that emphasizes administrative modernization, adjustment of incentive policies, and expansion of the tax base through the formalization of the informal sector. The utilization of Coretax is part of the effort to improve the ease of compliance, while the evaluation of tax holidays and tax allowances is being conducted to align incentive policies with the implementation of the Global Minimum Tax (GMT) and changes in the economic structure. On the other hand, formalizing the informal sector still faces challenges in the form of institutional quality, data integration, inter-ministerial coordination, and public trust in state administrators.

Moving forward, the direction of tax reform is not only related to increasing revenue but also to building a tax system that is fair, predictable, and adaptive to economic changes. The strengthening of data and technology, the provision of optimal public services and incentives, legal certainty, and trust-building are all integral parts of the effort to expand the tax base and support the achievement of economic growth targets while maintaining fiscal discipline.