World Bank and OECD Say Indonesia's Turnover Tax Threshold of Rp4.8 Billion Is Too High

The World Bank has assessed that Indonesia’s tax threshold for small enterprises at Rp4.8 billion annually is too high, resulting in a minimal tax base. This finding was revealed in its report titled ‘Reforms for a Formal and Prosperous Indonesia’.

This assessment aligns with the Organisation for Economic Co-operation and Development (OECD) in its November 2024 Economic Survey of Indonesia. The OECD noted that the threshold of US$300,000 is significantly higher than most OECD countries, which average Rp1.35 billion or US$80,000.

“Indonesia’s VAT registration threshold of Rp4.8 billion is nearly six times the average threshold across OECD countries,” the World Bank stated in its latest report on 10 March 2026.

The World Bank contends that this elevated threshold substantially narrows the VAT base, resulting in only approximately 0.3 per cent of small businesses currently paying VAT.

“Because the VAT threshold is far higher than the income of micro and small businesses in Indonesia, this high threshold particularly limits the number of medium-sized enterprises registered in the VAT system, thereby reducing tax collection efficiency,” said the World Bank.

The World Bank notes that exempting most SMEs from tax obligations shields them from administrative burdens and compliance costs associated with VAT. However, the World Bank emphasises that Indonesia’s economy is dominated by SMEs, which comprise 99 per cent of all enterprises and contribute 60 per cent of GDP. Compared with other countries of similar income levels, Indonesia has a relatively small number of large companies, approximately 30 per million inhabitants in 2023, compared with 60 in Vietnam, 115 in Mexico, and 153 in Brazil.

Consequently, the exemption of the majority of SMEs from tax obligations, according to the World Bank, constrains their ability to conduct formal transactions, particularly as they cannot issue VAT invoices.

“As a result, they become less attractive as partners for large companies requiring such documentation for input tax credit claims. This dynamic impedes the formation of forward and backward linkages between the informal and formal sectors, thereby limiting SME access to broader markets and larger supply chains,” the World Bank stated in its report.

The high VAT threshold, the organisation argues, not only reduces tax revenue but also hinders SME integration into the formal economy, thereby limiting the potential for growth and SME contribution to economic development.