A Decade of Jokowi’s Tax Policies

By Andrean Rifaldo, the Directorate General of Taxes officer

A decade of Joko Widodo's presidency has brought significant changes to the national tax system. Not only in policy reforms, but also in leadership within the institution.

At the beginning of Jokowi's first term, the Minister of Finance was held by Bambang Brodjonegoro. During his tenure, Bambang issued a Ministry of Finance Regulation that raised the non-taxable income (PTKP) threshold for individuals.

Starting in June 2016, the threshold was set at Rp 54 million (~$3,500), with an additional Rp 4.5 million (~$290) per dependent. This regulation remains the basis for PTKP calculation to this day.

The policy doubled the previous threshold, which, before Jokowi’s administration, stood at Rp 24.3 million (~$1,600) with an additional Rp 2 million (~$130) per dependent. The goal was to maintain the public’s purchasing power amid rising commodity prices.

Bambang Brodjonegoro was also the Minister of Finance behind the issuance of the 2016 Tax Amnesty Law. However, before fully realizing the program, Bambang was reassigned as the Minister of National Development Planning during the cabinet reshuffle in July 2016.

The baton of Minister of Finance was then passed to Sri Mulyani, who had previously served as Minister of Finance during Susilo Bambang Yudhoyono’s presidency.

Many viewed the return of the former World Bank Managing Director as a great decision, bringing about significant economic and fiscal progress. In the first three years of her term from 2017 to 2019, Sri Mulyani was even named the best Minister of Finance in Asia by FinanceAsia magazine.

Sri Mulyani successfully realized the 2016 Tax Amnesty program initiated by Bambang Brodjonegoro, making it one of the largest tax amnesties globally. Total revenue reached Rp 114 trillion ($7.3 billion) from asset declarations amounting to Rp 4,813 trillion ($309 billion), equivalent to 39 percent of Indonesia’s gross domestic product.

During Jokowi’s second term, the government launched another tax amnesty program called the Voluntary Disclosure Program (Program Pengungkapan Sukarela/PPS). While not as large as the 2016 Tax Amnesty, the program successfully recorded asset disclosures of Rp 594 trillion ($38 billion), with tax revenues amounting to Rp 61 trillion ($3.9 billion).

There have also been significant advances in tax fairness for micro, small, and medium enterprises (MSMEs). The special tax rate for MSMEs, introduced during the administration of Susilo Bambang Yudhoyono, was reduced under President Jokowi's leadership.

In 2018, President Jokowi issued a government regulation that lowered the tax rate from 1 percent to just 0.5 percent. However, the new regulation imposed a time limit on its use.

The duration is set at 7 years for individuals, 3 years for corporations in the form of limited liability companies, and 4 years for other business entities. This limitation was intended to encourage MSMEs to adapt to more systematic financial bookkeeping.

Furthermore, starting in 2022, President Jokowi signed another government regulation exempting MSMEs with annual turnover of up to Rp 500 million (~$32,000) from paying taxes.

With these various facilities, MSMEs have become one of the sectors benefiting the most from tax expenditures. In the 2024 State Budget alone, 21.2 percent of the Rp 374.5 trillion ($24 billion) allocated for tax expenditures is directed towards the development of MSMEs.

The tax exemption policy is part of Jokowi's second term, during which tax dynamics developed more rapidly. Tax performance fluctuated significantly due to the pandemic and the ongoing tax reform program.

In 2020, the state budget was revised twice to adjust to the economic conditions impacted by the Covid-19 pandemic. The budget deficit that year reached Rp 947 trillion ($61 billion), a 271 percent increase from the previous year.

One of the reasons for this was the sharp decline in tax revenues due to the decrease of economic activities, while the need for budget spending soared to stimulate those activities.

The 2020 State Budget Law, passed in 2019, initially set a tax revenue target of Rp 1,865 trillion ($120 billion). When the economy contracted due to the pandemic, the target was reduced to Rp 1,699 trillion ($109 billion), with the final realization being only 96.9 percent of that amount.

Amid this economic recession, the government enacted Law No. 2/2020, which regulated state financial policies during the Covid-19 pandemic. One of its provisions outlined the direction of tax policies during the pandemic.

This legislation paved the way for the government to expand the tax base to the digital sector. Starting in July 2020, value-added tax (VAT) was levied on the use of digital products and services from abroad, such as music and movie streaming, as well as in-app purchases and online games.

The policy also reduced the corporate income tax rate from 25 percent to 22 percent. Although initially intended as an economic stimulus during the pandemic, this reduction was eventually made permanent through the Tax Regulation Harmonization Law (Harmonisasi Peraturan Perpajakan/HPP).

Enacted in 2021, the law became a comprehensive reform that amended various other tax-related laws. Such broad tax policy reforms had not occurred since 2007 to 2009.

One of the key points amended by the HPP Law was the previously fixed 10 percent VAT rate. This marked the first time the rate had been changed since the enactment of the VAT Law in 1983.

Under the HPP Law, the VAT rate was set to increase gradually. The first hike, to 11 percent, took effect in April 2022, with the next increase to 12 percent planned to take place by January 2025 at the latest.

This rate increase aims to optimize state revenue, given that Indonesia’s national VAT rate is still lower than the international average VAT rate of 15 percent.

The HPP Law also sought to enhance fairness in the imposition of personal income tax. The maximum income threshold for the 5 percent tax rate was raised from Rp 50 million (~$3,200) to Rp 60 million (~$3,850).

Meanwhile, annual income exceeding Rp 5 billion (~$320,000) is now subject to a new tax rate of 35 percent. In the first half of 2023, this new rate generated Rp 3.5 trillion ($225 million) in revenue from 5,443 ultra-wealthy individuals in Indonesia.

Another transformative policy in the HPP Law is the integration of the personal identity number (NIK) as the taxpayer identification number (NPWP). This policy has been in effect since July 2024 and reflects the government's support for Indonesia’s One Data initiative.

The integration of NPWP into NIK will certainly simplify administrative processes for citizens requiring a tax number, such as when obtaining financial and banking services.

The tax reforms implemented by President Jokowi's administration have proven successful. Over the past three years, tax revenues have consistently exceeded the targets set in the state budget.

Prior to 2021, the last time tax revenue met its target was in 2008. More than a decade had passed without tax revenue reaching its target. Interestingly, throughout the four years when tax revenue targets were achieved—2008 and 2021 to 2023—the serving Minister of Finance was Sri Mulyani.

This marks a significant achievement for President Jokowi's administration in building fiscal capacity. There is concrete evidence that the national tax system has truly advanced over the past decade.

However, Jokowi's administration also leaves behind several tax policy plans whose realization will be determined by the next administration under Prabowo Subianto.

Firstly, the carbon tax, which is planned to take effect starting in 2025. Its introduction was actually included in the HPP Law passed in 2021, but its implementation was postponed from the initial plan of April 2022.

The extent of the carbon tax's impact will be determined by the next administration's decision, including whether it will apply to fuel and electricity generation, which are essential needs for the public.

Secondly, Indonesia has committed to implementing a global minimum tax of 15 percent starting in 2025. This means the next administration’s task will be to adopt this international agreement into national tax law, including revising tax holiday incentives that may not align with this policy.

Thirdly, the new coretax system will also take effect in 2025. Although its development was carried out during Jokowi's administration, its successful implementation now depends on the performance of the next government.

As the country prepares for the leadership transition on October 20, President Jokowi has indeed left a strong fiscal foundation for President-elect Prabowo Subianto.

Over the past decade, Jokowi's administration has made significant progress in tax governance: administrative systems are more efficient, tax regulations are more concrete, and the tax base is broader.

Thus, the next administration has the right foundation to continue improving tax performance going forward, including raising the tax ratio as targeted.

*) This article represents the author's personal views and does not represent the stance of the institution. The Indonesian version of this article has been published in Kompas.com on October 13th, 2024.

Content available at this page can be copied and utilized for non-commercial purposes. However, we urge users to mention sources of content being used by hyperlinking or referring to original page. Hopefully it helps you. Thank you.