For full-year 2016 Indonesia's tax office targets tax revenue of IDR 1,360.2 trillion (approx. USD $103 billion). From the start this target (set in the 2016 State Budget) met resistance as analysts considered it a highly unrealistic target, particularly given Indonesia's tax collection in 2015 only reached IDR 1,060.9 trillion (approx. USD $80.4 billion). It remains unclear what could support the jump from last year's tax revenue realization of IDR 1,060.9 trillion to the government's target of IDR 1,360.2 trillion in 2016 (this would require a 28 percent year-on-year surge). Economic growth is expected to accelerate slightly to 5.3 percent (y/y) from 4.8 percent (y/y) but that would not be sufficient to cause a 28 percent surge in tax collection. Meanwhile, the implementation of the government's proposed Tax Amnesty Bill had to be delayed as Indonesia's House of Representatives (DPR) postponed deliberation until April 2016.

Weaker-than-expected tax revenue causes trouble for the government's budget balance as tax revenue accounts for more than 70 percent of the IDR 1,822.5 trillion that has been earmarked for state spending in 2016. For additional funds the government may need to sell more bonds or take up new loans. The government's budget deficit was originally targeted at 2.15 percent of the country's gross domestic product (GDP). However, due to additional financing this ratio may rise to around 2.5 percent of GDP in 2016.

One of the structural problems that gives rise to low tax revenue in Indonesia is people's low tax compliance. In Indonesia there are only about 27 million registered tax payers, while it is estimated that there are 120 million people that should pay taxes (and the country has a population that numbers 255 million). As a result, Indonesia has a tax-to-GDP ratio of 12 percent only, hence being among the weakest worldwide. Finance Minister Brodjonegoro announced today that Indonesia plans to cut income tax for individuals (making tax rates more competitive) in an effort to boost people's tax compliance. Currently, depending on the income figure, personal income tax rates range between 5 and 30 percent. He declined, however, to provide further details about the tax cut (including the time frame).

In response to the Panama Papers, the massive leak of 11.5 million documents revealing hidden offshore dealings in the assets of around 140 political figures as well as celebrities, sport stars and businessmen, Indonesia's Directorate General of Taxes said it requires more (quality) manpower to investigate tax dodging claims listed in these leaked documents. Currently, Indonesia's tax office employs 38,500 tax officers who handle the corporate and personal taxes. However, only 5,000 officers are assigned to investigate audits.

The tax office identified 2,000 special purpose vehicles in March, set up by Indonesian firms and 6,000 saving accounts in overseas tax havens. The Tax Amnesty Bill could be a solution. This bill gives amnesty to those tax evaders that have been hiding their wealth abroad by using shell companies. Deliberations on the bill are expected to start this month. Earlier, the government said the bill could bring in USD $4.5 billion worth of additional tax revenue.