This 'Windfall Tax' Model is Suitable for Indonesia, Ensuring State Finances Remain Secure!

Jakarta, CNBC Indonesia - The Institute for Development of Economics and Finance (INDEF) believes that implementing PRRT (Progressive Resource Rent Tax) or windfall tax, also known as the ‘jackpot’ tax, across Indonesia’s extractive sectors (oil and gas and minerals), with parameter adaptations suited to commodity characteristics, can optimise Indonesia’s tax revenues when commodity prices rise while safeguarding deficits when prices fall.

Based on counterfactual simulations by INDEF covering all commodities over the 2009-2023 period, Indonesia has the potential to increase average annual receipts by Rp67 trillion per year (2017-2024), peaking at Rp192 trillion in 2022 (equivalent to 0.98 percent of nominal GDP in 2022), predominantly from coal.

In years of low prices (2015-2016, 2020) and late 2024, simulated receipts approach zero, consistent with the countercyclical design. These figures represent an upper-bound; phased implementation would yield proportionally lower revenue trajectories in the early years.

“Commodity windfalls will continue to recur. The question is not whether Indonesia is ready, but how quickly its fiscal architecture can be reformed before the next cycle,” INDEF writes in its Policy Brief, quoted on Friday (17/4/2025).

PRRT is a tax on economic rent imposed above a normal rate of return threshold, with progressive rate tiers based on project profitability.

“This proposal stems from the classic dilemma of resource-rich countries: abundant revenues when commodity prices rise, deficits when prices fall. Price volatility is permanent and difficult to predict,” says INDEF.

PRRT imposes additional progressive taxes on profits exceeding the normal rate of return from extractive projects.

Any 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 charged per unit of production without regard to profitability, PRRT is countercyclical. When prices are low and per-unit profit margins are thin, the PRRT burden approaches zero. When prices are high and per-unit profit margins widen, the rates increase gradually,” writes INDEF.

INDEF Policy Recommendations

INDEF’s recommendations are divided into two parts: substantive steps to build the PRRT regime and implementation challenges that need to be managed in parallel.

1. Build the PRRT regime through legislation, and in the meantime, close windfall gaps via 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 pathways are needed.

• Legislative pathway (long-term): The Ministry of Finance, Ministry of Energy and Mineral Resources, and Bappenas prepare the PRRT Bill jointly with academics and the DPR, either as a standalone law or amendments to the Income Tax Law and the Job Creation Law.

• Transitional regulatory pathway 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 rates; (ii) Presidential Regulation allocating progressive royalty receipts under high-price conditions into a stabilisation reserve fund; (iii) Ministry of Energy and Mineral Resources and Ministry of Finance Regulations to strengthen production and cost reporting per contract.

• Clear role division: Transitional regulations improve the structure of gross revenue royalties and bridge the windfall capture gap, while the PRRT Law remains the sole constitutional instrument for fully capturing economic rent.

2. Implement PRRT prospectively to maintain fiscal regime credibility and minimise increases in the cost of capital in the extractive sector. Taxes on rents perceived as potentially retroactive 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. Adherence to the sanctity of contracts is thus 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 foreign direct investment 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 shifted most contracts to the new regime without triggering investment arbitrage or declines in upstream investment.

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 the regime’s 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 receipts per contract, including threshold parameters and captured rents.

5. Align PRRT with the mineral downstreaming agenda. PRRT targets rents from extraction, not value-added processing; the design must explicitly support downstream investments.

• Proportional reduction in the PRRT base for companies