Designing Effective Tax Incentives: A Needs-Based Approach

JAKARTA, DDTCNews - Tax incentive designs must be targeted, limited and not dispensed indefinitely to ensure implementation is effective and does not result in fiscal losses.

According to Denny Vissaro, Manager of DDTC Fiscal Research and Advisory, tax incentives must be aligned with specific requirements and the evolving economic landscape.

"Tax incentives should not be viewed as permanent designs, because in the next 3 to 5 years, we may require different incentives as economic needs shift," he stated during the 2025 Annual Conference of Taxation titled 'Tax Incentives for Strategic Sectors: A Masterstroke or a Challenge for Tax Ratio and Economic Growth?' hosted by Sebelas Maret University on Sunday (22/6/2025).

Denny outlined 5 key strategies the government can employ to ensure tax incentives are effectively utilised by taxpayers.

First. objective and targeted design. The government, as the regulator, must map out sectors where growth is hindered and require tax support.

Second, limited scope. This implies that the provision of incentives should not automatically cover all taxes. Third, incentives should be transient rather than permanent.

Denny explained that the government needs to adjust incentives in line with both global and national economic developments. This includes aligning fiscal policy with Indonesia’s future development agenda and identifying business sectors that no longer require incentive injections.

Fourth, monitoring and evaluating incentive recipients to prevent misuse. One method is tracking investment realisation to ensure it aligns with a company’s income statement.

Fifth, implementing socialisation and education for taxpayers concerning the wide range of available incentives they can utilise.

Denny also highlighted 3 aspects stakeholders must consider before deploying incentives to protect the state treasury from repeated revenue loss.

First, ensuring the recipient business sectors have the genuine potential to expand, attract investments and drive economic growth.

Second, exploring options beyond taxation to boost specific sectors, such as streamlining bureaucracy, improving legal certainty, providing infrastructure support and so forth. Third, ensuring that incentives eventually increase state revenues in related sectors.

"For example, if corporate income tax is reduced, productivity should ideally increase. This should lead to growth in Art. 21 Income Tax from employees and value added tax (VAT) from various products returning to the state as well as non-tax state revenues (penerimaan negara bukan pajak/PNBP in Indonesian) and excise. Thus, it becomes an investment for us, where the ultimate cost-benefit analysis proves effective," Denny remarked.

He added that the impact of tax incentives can be reviewed through a cost-benefit analysis. The formulation of tax incentives to boost national economic competitiveness must be grounded on 3 primary factors: objectives, eligibility criteria and administrative/governmental capacity. (rig)