The International Monetary Fund (IMF) sees room for Indonesia's tax ratio to rise up to 15 percent of gross domestic product (GDP). Luis Breuer, IMF Mission Chief for Indonesia, expects to see an improvement in Indonesia's tax ratio - from the weak level of 10 percent of GDP in 2017 - on the back of Indonesia's improving economic growth. Accelerating economic growth should boost tax revenue realization.
The IMF expects Indonesia's economic growth to rise gradually, yet steadily, to a pace of 5.6 percent (y/y) over the medium term (2020), from a growth realization of 5.07 percent (y/y) in 2017. Infrastructure development is crucial as it would improve the investment climate, reduce logistics costs as well as social issues. However, Breuer adds that the Indonesian government needs to encourage the participation of the private sector in the government's ambitious infrastructure development program.
Recently, Indonesian Finance Minister Sri Mulyani Indrawati said Indonesia needs a total of IDR 5,000 trillion (approx. USD $367 billion) to finance this infrastructure program. These funds cannot be delivered solely by the central government or the state-owned enterprises.
An improving tax-to-GDP ratio would have big advantages as it opens a pool of funds that can be used by the government for investment in infrastructure development, education, and healthcare. A rising amount of tax revenue would also mean that the Indonesian government can reduce its dependence on foreign debt.
Indonesia's weak tax ratio is caused by Indonesians' weak tax compliance as well as weak monitoring conducted by authorities (there is a lack of tax officials and inspectors). Anton Gunawan, economist at Bank Mandiri, said the Indonesian government can only gradually encourage Indonesians to become faithful taxpayers (for example through the recent tax amnesty program). But this may only push Indonesia's tax ratio up to 12 or 13 percent.