Restructuring the MSME Tax Base

Good policies often face a paradox. On one hand, the government wants to help small businesses grow and develop. However, the assistance provided sometimes creates incentives for these businesses to remain small. This paradox is addressed by the change in the Final Income Tax (PPh) policy for MSMEs through Government Regulation (PP) Number 20 of 2026. The government retains the 0.5 per cent final PPh rate but narrows the group eligible for this facility. Going forward, this facility can only be utilised by individual taxpayers and single-person PTs that meet the requirements. Meanwhile, business entities such as CVs, firms, and PTs are no longer recipients of this facility. They are directed to enter the general taxation mechanism.

Some may view this policy as a reduction in incentives for the business world. However, this step can instead be read as an effort to restructure the MSME tax base to be healthier, fairer, and supportive of long-term economic growth. From the outset, the final MSME tariff was designed to simplify tax obligations for small business operators. With a low rate and a simple mechanism, business operators avoid complicated administrative burdens. The primary goal was to encourage compliance and attract more businesses into the formal sector. The policy had tangible benefits, making it easier for many micro and small business operators previously reluctant to interact with tax administration to fulfil their obligations. In the context of a developing country like Indonesia, administrative simplification is often just as important as the tariff rate itself.

With various advantages for small businesses, many operators actively sought to maintain that status. They might delay expansion, regulate turnover so as not to exceed certain limits, or even split businesses into several smaller entities. In tax economics literature, this phenomenon is known as bunching. In other words, business decisions are no longer driven entirely by economic considerations but more by efforts to retain tax facilities. The problem is not merely a loss of state revenue. More importantly, this condition can create distortions in the economy. Companies should grow because market demand increases, productivity improves, or business opportunities expand. Yet, when tax incentives become too dominant, some business operators have a reason to limit growth. Consequently, a policy intended to help small businesses can turn into an obstacle for the business graduation process itself.

Warnings of this nature have long appeared in various international studies. For instance, the Organisation for Economic Co-operation and Development (OECD) (2024) stressed that simplified tax systems for small businesses are indeed necessary to reduce compliance costs. However, tax policy should not create overly large differences in treatment. In other words, tax policy should facilitate business growth, not create disincentives against it. In the Indonesian context, this warning becomes increasingly relevant. Data from the Ministry of MSMEs (2024) shows Indonesia’s economic structure is dominated by small business operators at 59.64 per cent. However, this dominance in numbers has not been fully reflected in a robust and adequately documented tax base. The government also openly mentioned the practice of business splitting to obtain MSME tax facilities. Administratively, these businesses appear independent. Economically, however, they may be part of the same business group.

If such practices occur widely, the policy targets become blurred. Facilities that should be given to small traders, home-based entrepreneurs, or micro business operators could potentially be enjoyed by parties with greater economic capacity. Therefore, the government’s latest policy should not be seen as a reduction of incentives but rather as an effort to improve incentive targeting. Small business operators still get the ease they need. However, business entities that already have better administrative capacity are directed to use a tax system more appropriate to their business scale. In this context, bookkeeping plays a crucial role. For some business operators, bookkeeping may be viewed as an additional administrative burden. Yet, in the long run, bookkeeping actually becomes an important foundation for business growth.

Through good bookkeeping, business operators can understand their financial condition more accurately, gain easier access to formal financing, and build more professional business governance. From the state’s perspective, bookkeeping also helps create a more transparent and fair tax system. Ultimately, the goal of MSME policy is not to maintain as many businesses as possible in the small category. The goal is to help them grow, develop, and graduate. Therefore, the measure of success for MSME tax facilities lies not in how long business operators can enjoy special rates. The measure is how many businesses successfully grow to become larger, more productive, and formal. A good tax facility is not one that makes business operators comfortable staying small, but one that encourages them to dare to grow. In that perspective, restructuring the MSME tax base is not merely tax reform. It is a policy investment to create more businesses capable of graduating and becoming the backbone of the Indonesian economy. For in the end, a good tax system not only collects state revenue but also creates the right incentives for economic growth.