Last year, Indonesia posted a staggering IDR 234 trillion (approx. USD $17.2 billion) shortfall in tax revenue (18 percent short of the target set in the 2015 State Budget). The shortfall was the result of an overly ambitious tax revenue target (the 2015 target implied a 31 percent growth from tax revenue realization in the preceding year) in combination with the economic slowdown. As domestic economic activity continued to slow (implying weaker corporate tax collection) while government revenue from commodity exports was - and still is - curtailed by persistently low commodity prices there were few reasons - or non at all - that could justify such a steep growth.

Persistently low commodity prices, dragged down by sluggish global economic growth and low crude oil prices, remain a problem. For example, the government has not been able to charge an export tax on palm oil (one of Indonesia's key foreign exchange earners) as the global palm oil price has been below the government's USD $750 per ton threshold since September 2014 (when prices are below this target the government scraps the palm oil export tax).

The table below shows that the Indonesian government has a track record of not achieving its tax revenue target. In the last eight years the government only managed to achieve its tax revenue target in 2008. In all other years it failed to achieve the target. In fact, starting from 2008 target and realization have become increasingly out of tune, culminating in the enormous IDR 238.7 trillion shortfall last year. This shortfall is larger than the combined tax shortfall in the years 2010-2014; a cause for concern and raises the question how professional and realistic the Joko Widodo administration actually is. By setting another high tax revenue target in 2016 - most likely unable to be achieved - the government may be building castles in the sky. After all its ambitious infrastructure development program is partly dependent on government spending (which is mostly generated through tax money).

Indonesia's Tax Collection Target and Realization 2008-2016

   2008  2009  2010  2011  2012  2013  2014  2015  2016
(in IDR trillion)
 534.5  597.5  661.4  878.7  885.0  995.2 1,072.4 1,294.3 1,360.1
(in IDR trillion)
 607.4  563.2  650.0  872.6  835.3  916.3  984.9 1,055.6 1,160.0¹
(in IDR trillion)
  72.9   34.3   11.4    6.1   49.7   78.9   87.5  238.7  200.1¹

green color indicates that tax revenue realization met the target set in the State Budget; red color indicates that tax revenue realization failed to meet the target
indicates forecast
Sources: Direktorat Jenderal Pajak & Nota Keuangan

Indonesian Finance Minister Bambang Brodjonegoro told reporters that the low crude oil prices are indeed a factor that drag down Indonesia's tax revenue. However, he is confident that the government can manage to achieve its 2016 tax revenue target provided that the country's new tax amnesty bill is a success. This controversial bill, which still requires discussion between the government and the House of Representatives (DPR), will offer a big tax cut for those tax dodgers who have stored their wealth abroad without reporting it to Indonesia's tax authorities and are willing to repatriate these funds. Brodjonegoro added that the government also needs to optimize tax collection through better monitoring in order to improve people's tax compliance and generate additional tax revenue through the tax incentive given to those companies that revalue their fixed assets.

Non-optimal tax collection is reflected by Indonesia's weak tax-to-GDP ratio. It is estimated that the country's tax-to-GDP ratio stands at around 12 percent, among the lowest worldwide. This weak ratio is possible due to weak tax compliance in combination with weak tax monitoring and law enforcement. Tax evasion is rampant, while the country's informal sector is larger than the formal sector (it is estimated that between 55 and 65 percent of employment in Indonesia can be labelled informal) and the number of tax officials is insufficient (and it is believed that corruption among tax officials curtails the country's tax revenue).

Tax Collection in 2016

However, the tax shortfall is expected to be smaller in 2016 as tax revenue growth should be supported by accelerating economic growth. In 2015 the Indonesian economy expanded 4.8 percent year-on-year (y/y), the slowest growth pace since 2009. Most analysts estimate that in 2016 Indonesia's GDP growth will accelerate to 5.3 percent (y/y). This should manage to boost tax collection this year. Still, the 2016 target is unrealistic despite additional revenue being generated through asset revaluation and the tax amnesty bill. As the tax amnesty bill still requires time before being implemented the country may really enjoy additional tax revenue from tax offenders next year, not so much in 2016. This year a total of IDR 50 trillion (approx. USD 3.4 billion) may be generated through the tax amnesty bill. For now we estimate that Indonesia will collect a total of IDR 1,160 trillion (approx. USD $85 billion) in tax revenue in 2016.