Tax Revenue Performance in Indonesia:

Its Trend and Potential

As a developing country, Indonesia still needs a lot of revenue mobilization, especially to provide space
for infrastructure and social development. Now, at , Indonesia has the lowest tax revenue to GDP ratio
in G-20 and among neighboring countries or emerging market economies.
However, there are many challenges faced by Indonesia that hinders its revenue performance.

Not only rely on tax revenue to GDP ratio, this paper uses several other concepts to review Indonesian
tax revenue performance and to measure its potential. The first concept is tax efficiency ratio. Tax
efficiency ratio is calculated as tax revenue as a percentage of GDP or consumption, divided by the
standard tax rate (IMF, 2011).
The second concept is tax efforts which is measured by the ratio of actual tax revenue collected to
estimated tax capacity (IMF, 2011). Tax capacity represents the calculated maximum tax revenue that a
country can collect based on their socio-economic characteristics. In other words, tax capacity measures
the maximum tax revenue

Tax efficiency ratio: measured as tax revenue as a percentage of GDP or consumption, divided
by the standard tax rate, is relatively low compared to the average for East Asia and for other
middle income countries, in particular CIT and VAT.
Policy gap the difference between collections under current law and those obtained if all
exemptions not consistent with best practice and all reduced rates were eliminated.
o Can be reduced by broadening the tax bases.
o Very high in Thailand, reason: very few exemptions in their VAT system, no reduced
rate, and the VAT rate is limited to a very few items (exports, diplomats, NGOs).
Compliance gap the difference between current tax collections and those that would be
obtained if the existing tax law was perfectly enforced.
o Can be reduced by revenue administration reforms, but usually yield their results over
an extend period of time.
Tax Capacity: represents the maximum tax revenue that a country can collect under its level of
economic and social development and demographic characteristics. Tax Efforts can be
measured by the ratio of actual tax revenue collected to the estimated tax capacity.
o Indonesia collects about 53.8 percent of the maximum tax revenues that it could
achieve.
o Indonesian tax effort is higher than in several neighboring countries, but it is lower than
the median value of low and lower middle income countries, indicating substantial
space for improvement.