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View all search resultsTaxing the barber will not close Indonesia’s revenue gap
Small businesses are brought into the the tax net once the state shows them what registration buys. Indonesia offers that deal only to its bigger borrowers.
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Record trim: Barbers attend to customers during the Nationwide Free Haircut Festival at Mangkunegaran, Surakarta, Central Java on May 28, 2025. The event was organized by the Employee Association of the Ministry of Agrarian Affairs and Spatial Planning/National Land Agency (ATR/BPN) to break the Indonesian Record Museum (MURI) haircut record. (Antara/Mohammad Ayudha )
A
t a national meeting of the Indonesian Chamber of Commerce and Industry (Kadin) in late October, Hashim Djojohadikusumo, President Prabowo Subianto’s special envoy for climate and energy, noted that 30 to 40 percent of Indonesia’s economy operates off the books. By his estimate, this costs the state roughly Rp 1.5 quadrillion (US$83 billion) each year.
His prime examples were neighborhood barbers and salons that deal in cash and collect no value-added tax (VAT). The political appeal is obvious: targets sit on every street corner, and the remedy sounds inexpensive.
In reality, micro-entrepreneurs will register only if the state first provides a tangible return linked directly to compliance. Political economists call this reciprocity a fiscal contract: citizens pay, and the state delivers benefits they can actually feel.
Revenue concerns are undeniably justified. Indonesia’s tax-to-GDP ratio, including customs and excise, stood at just 9.31 percent in 2025. For 2026, the government projects tax collections will fall approximately Rp 47 trillion short of its target.
Yet the Rp 1.5 quadrillion figure rests on a flawed premise: comparing Indonesia’s revenue ratio directly with Cambodia’s. A peer gap illustrates relative performance; it does not measure untaxed capital flight or evasion. World Bank estimates place Indonesia’s shadow economy closer to a fifth of GDP, far below the 30 to 40 percent mark.
If the state wants to recover missing revenue, corporate balance sheets are where it should look. The World Bank estimates that corporate income tax compliance losses averaged Rp 160 trillion annually between 2016 and 2021, roughly one-third of total corporate tax obligations. Research by The PRAKARSA further revealed that trade misinvoicing in coal and fisheries alone cost the state Rp 74 trillion between 2012 and 2021.
The World Bank identified the largest shortfall in VAT compliance, which averages Rp 386 trillion annually and is partially tied to informality. The report highlights the current Rp 4.8 billion VAT registration threshold as a key driver, as many enterprises intentionally cap their reported turnover just beneath the ceiling.
