Indonesia Could Pocket Rp 67 Trillion Annually from Coal-CPO Windfall Tax

Indonesia has the potential to increase its average annual revenue by Rp 67 trillion if it implements a windfall tax, or “durian runtuh” tax. Based on a counterfactual simulation by the Institute for Development of Economics and Finance (INDEF) covering all commodities from 2009 to 2023, Indonesia could have obtained Rp 67 trillion from 2017 to 2024, peaking at Rp 192 trillion in 2022 (equivalent to 0.98% of nominal GDP in 2022), predominantly from coal commodities. In years of low prices (2015-2016, 2020) and the end of 2024, the simulated revenue approaches zero, consistent with the countercyclical design. These figures represent an upper-bound; gradual implementation would result in proportionally lower revenue trajectories in the early years. INDEF believes that applying PRRT (Progressive Resource Rent Tax) or windfall tax broadly to Indonesia’s extractive sectors (oil and gas and minerals, with parameter adaptations according to commodity characteristics) can optimise Indonesia’s tax revenue during rising commodity prices while maintaining deficits during falling prices. PRRT is a tax on economic rent imposed above the threshold of normal return levels, with progressive tariff layers according to project profitability. “This proposal stems from the classic dilemma of resource-rich countries: abundant revenue when commodity prices rise, deficits when prices fall. Price volatility is permanent and difficult to predict,” writes INDEF in a Policy Brief quoted on Friday (24/4/2025). “Commodity windfalls will continue to recur. The question is not whether Indonesia is ready, but how quickly its fiscal architecture can be repaired before the next cycle,” adds INDEF. PRRT imposes additional progressive taxes on profits exceeding the normal rate of return from extractive projects. Every profit exceeding capital costs and exploration risks constitutes economic rent, which is a surplus arising from the scarcity of state-owned resources, not from investor expertise or innovation. “Unlike royalties imposed per unit of production without considering profitability, PRRT is countercyclical. When prices are low and profit margins per unit are thin, the PRRT burden approaches zero. When prices are high and profit margins per unit widen, tariffs increase gradually,” writes INDEF. INDEF Policy Recommendations INDEF’s recommendations include substantive steps to build a PRRT regime and implementation challenges that need to be managed in parallel, as follows: 1. Build the PRRT regime through legislation, and in the meantime, close windfall gaps through transitional regulations. Article 23A of the 1945 Constitution requires that new taxes on resource rents can only be established through law; Government Regulations, Presidential Regulations, and Ministerial Regulations cannot create new tax obligations. Therefore, two parallel paths are needed. - Long-term legislative path: The Ministry of Finance, Ministry of Energy and Mineral Resources, and Bappenas prepare a PRRT Bill jointly with academics and the DPR, either as a standalone law or amendments to the Income Tax Law and Job Creation Law. - Transitional regulatory path for 12-24 months (without new taxes): (i) Government Regulation complementing PP 18/2025 and PP 19/2025 that adds capacity utilisation and profit proxy as parameters for progressive royalty tariffs; (ii) Presidential Regulation for allocating progressive royalty revenues under high-price conditions into a stabilisation reserve fund; (iii) Ministerial Regulations from the Ministry of Energy and Mineral Resources and Ministry of Finance to strengthen production and cost reporting per contract. - Clear division of roles: Transitional regulations improve the structure of royalties on gross revenue and bridge the windfall capture gap, while the PRRT Law remains the sole constitutional instrument for fully capturing economic rent. 2. Apply PRRT prospectively to maintain fiscal regime credibility and minimise increases in the cost of capital in the extractive sector. Taxes on rents perceived as applicable retroactively can trigger time-inconsistency problems (Daniel, Keen & McPherson, 2010): investors raise risk premiums on new investments, project hurdle rates increase, and exploration decisions are pressured. Compliance with the sanctity of contract is therefore an economic instrument to keep sector capital costs low, not just a legal principle. - Binding new contracts after the law takes effect. The PRRT regime is applied prospectively to provide certainty of rules for future investments and prevent sunk-cost appropriation of already committed capital. - Grandfather clause for existing contracts. Ongoing contracts are protected to keep expected returns on committed capital intact; this is important because FDI inflows in the upstream sector are lumpy and path-dependent, so negative signals from one regime will accumulate across investment cycles. - Opt-in voluntary benefit. Existing contractors can enter the PRRT regime voluntarily with measured fiscal incentives, following Australia’s precedent during the transition from Crude Oil Excise to PRRT in the 1990s, which successfully moved most contracts to the new regime without triggering investment arbitration or upstream investment declines. 3. Build integrated data infrastructure as the operational foundation of the regime. Without credible production and cost data per contract, profitability-based PRRT audits cannot be executed. - Integrated database of SKK Migas, Directorate General of Minerals and Coal of the Ministry of Energy and Mineral Resources, and the Directorate General of Taxes with a 2-3 year development horizon. 4. Make transparency a core principle, not a supplementary feature. Transparency is a precondition for regime credibility in the eyes of the public and investors. - Elevate Indonesia’s commitment in the Extractive Industries Transparency Initiative from the reporting stage to full implementation. - Periodically publish all PRRT calculations and revenues per contract, including threshold parameters and captured rent. 5. Align PRRT with the mineral downstream agenda. PRRT targets rent from extraction, not value added from processing;