Taxation, in general, makes up the largest portion of government revenue. Some taxes fund specific government programmes, while others fund the government in general. It is commonly believe that taxes are justified as they fund activities that are necessary and benefit the majority of the population.

In Indonesia, taxes constitute more than half of the state revenue, as depicted in the following graph.

Graph 1

Portion of tax revenue as compared to total state revenue

As a developing nation, every year Indonesia is in need of increasing the sum of revenue to fund infrastructure projects, welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation.

Despite the fact that taxation is claimed as the single largest contributor to the state coffers, tax collection in Indonesia has yet to reach the optimal level. In fact, in the past decade (except for 2008 as a result of implementation of the Sunset Policy) the Indonesian Tax Authority has yet to achieve its tax revenue target. In 2017, the realisation of tax revenue of Rp1,151 trillion is only 89.68% of the target state budget (APBN) of Rp1,283 trillion.

In order to resolve this situation, perhaps one of the best indicators to look at is the tax ratio; the ratio of tax revenue compared to gross domestic product (GDP).

The 2016 records show Indonesia has a tax ratio of 8.85%, which is lower that Australia (22.3%), Argentina (12.3%), Canada (11.7%), Singapore (14.2%), Thailand (15.6%) and the United Sates (10.8%). In addition, when the trend of tax revenue is analysed using the buoyancy ratio – the ratio between the growth of tax collection and GDP – it further shows a disappointing trend over the time span of the last decade.

Graph 2

Indonesia Tax ratio as compared to other countries

Sources : Indonesia Directorate General of Taxes

Graph 3

Tax Buoyancy Indonesia 2006-2017