Optimising VAT Revenue Without Increasing Rates

Of course, tax base reform cannot be implemented drastically.

Jakarta (ANTARA) - Over the past decade, Value Added Tax (VAT) contributions to the national budget have generally increased and remained relatively stable compared to Income Tax (PPh), which is heavily influenced by economic cycles and corporate profit fluctuations.

When the economy slows, Income Tax revenues typically decline. In contrast, VAT continues to support revenue as it relies on ongoing consumer activity.

Amid rising government spending needs, global economic pressures, and constrained fiscal space, the key question is no longer whether VAT remains relevant. The issue has shifted to how optimally Indonesia’s VAT system can capture the nation’s substantial consumption potential.

This is where the main challenge arises. International indicators show Indonesia’s VAT productivity still has significant room for improvement. The two most commonly used metrics for assessing VAT effectiveness are the C-efficiency ratio and VAT Revenue Ratio (VRR).

Simply put, these indicators measure how close actual VAT receipts are to the ideal potential that could be collected from national consumption.

In recent years, Indonesia’s performance has improved. The C-efficiency ratio, which dipped to around 42% during the pandemic, rose to nearly 55% in 2025. The VRR also increased from approximately 0.44 to 0.58. However, these figures still lag behind countries with more efficient VAT systems.

For comparison, New Zealand has a VRR approaching 0.96, indicating almost all consumption base is captured by the VAT system. Japan and South Korea both report ratios above 0.7. Meanwhile, Indonesia remains in the lower-middle tier, meaning most domestic consumption potential is not fully reflected in VAT revenues.

This situation highlights that Indonesia’s primary VAT issue is not the rate itself, but the narrow tax base. With political space for rate increases increasingly limited, expanding the tax base (base broadening) is a far more realistic and sustainable policy option.

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