Plugging Tax Revenue Leaks: Shadow Economy, HWI and Incentives

The Directorate General of Taxes (DGT) announced in 2025 that three main sources are driving tax‑revenue leakage. The sources are the shadow economy, high‑wealth or multinational taxpayers, and tax incentives. The identification aims to strengthen fiscal gap‑closing measures.

The shadow economy includes unreported legal and illegal activities, estimated to account for 8.3‑10 % of Gross Domestic Product (GDP). DGT responded with a turnover exemption for micro‑, small‑ and medium‑enterprises (UMKM) whose gross sales are below Rp500 million. High‑wealth individuals and multinational enterprises often use transfer pricing and asset‑shifting, now addressed by PMK No 172/2023 and PMK No 136/2024.

Tax incentives such as PPh 21 exemption and up to 300 % R&D cost deductions can also cause leakage if poorly targeted. Authorities stress precise targeting, transparency and data‑driven evaluation to secure economic benefits without increasing the state budget burden. These steps are expected to boost compliance and state revenue.