Proposing Whistleblower Tax Incentives to Broaden the Tax Base

IN the classic masterpiece The Art of War, Sun Tzu states that winning a war without needing to deploy troops to the battlefield is the pinnacle of supreme skill.

If this principle is transformed into the realm of modern tax administration, true success against tax non-compliance is achieved when the tax authority is able to design a system in which the market ecosystem can naturally monitor one another and promote compliance independently.

The need for this radical and efficient supervision strategy has become increasingly urgent amid Indonesia's consistently stagnant tax ratio performance over the past 5 years. Based on official data from the Ministry of Finance (MoF) published by DDTCNews, Indonesia's tax ratio in 2025 has even slipped to 9.31% of the gross domestic product (GDP), down from the previous year's level of 10.08%.

This figure places Indonesia well below the average tax ratio of Asia-Pacific countries, which stands at around 19%, and that of OECD member countries, which reaches an average of 33.5%.

This situation is compounded by the massive scale of shadow economy activity. A report by the Indonesian Financial Transaction Reports and Analysis Center (Pusat Pelaporan dan Analisis Transaksi Keuangan/PPATK in Indonesian) estimates the shadow economy's contribution in Indonesia at between 8.3% and 10% of GDP, equivalent to IDR1,958 trillion. Several international financial institutions even project a far larger figure, reaching as high as 30% to 40% of GDP.

The sheer scale of informal activity and undetected underground transactions automatically narrows the tax base, distorts employment data and creates a sense of injustice among compliant taxpayers. To capture this vast hidden potential without inflating compliance costs, the use of taxpayers as whistleblowers through the granting of direct tax incentives could serve as a sustainable tactical solution.

Learning from International Best Practice

The use of third parties to detect tax evasion has been implemented with great success in various developed countries. The United States has the IRS Whistleblower Office, which legally awards cash rewards of between 15% and 30% of the total tax arrears and fines recovered due to public reports. Through this programme, the IRS has secured billions of dollars in government revenue that had previously been beyond the reach of regular audit schemes.

In Asia, South Korea applies a similar financial reward system, popularly known as the "tax paparazzi," whereby citizens are given cash incentives if they successfully document and report retailers that refuse to issue tax invoices or conceal cash transactions.

Nonetheless, the concept developed in this article offers a refinement tailored to the psychological characteristics of entrepreneurs in Indonesia. Rather than providing direct cash rewards from the state treasury, which requires complex bureaucratic budgeting procedures, the government could offer direct tax-offset incentives. These incentives could take the form of tax credits or reductions in the corporate/individual income tax rate for the current tax year, available to taxpayers whose reports are proven valid in disclosing non-compliance data relating to their business partners.

Mapping Challenges and Obstacles

Although it promises high oversight efficiency, the implementation of this tax crowdsourcing-based supervision strategy carries a number of fundamental risks that must be mitigated in layers through a well-considered regulatory approach. The first and most crucial challenge lies in the stability of the business climate and the potential for mass paranoia to emerge among market participants.

There are concerns that this scheme could trigger acute mistrust within economic supply chain networks, whereby entrepreneurs begin to suspect one another and become reluctant to transact openly for fear that their internal financial data is being monitored by their own business partners. As a mitigation measure, the government must enforce strict and multilayered confidentiality of the reporting party's identity to ensure that market psychology remains conducive.

The next challenge is closely related to administrative constraints and the risk of excessive workloads on the internal operations of the Directorate General of Taxes (DGT). With attractive incentives on offer, the tax authority faces a high risk of being inundated with thousands of speculative, false or low-quality reports from parties merely trying their financial luck without any strong and valid evidential basis.

This administrative obstacle may only be countered through the construction of a digital preliminary screening system based on information technology. Such a system must establish strict minimum evidence materiality thresholds, so that reports not accompanied by concrete preliminary evidence are automatically eliminated before placing a burden on audit human resources.

Finally, there is a genuine threat of unfair and destructive business competition. This incentive-based reporting scheme could potentially be misused by certain parties as a tactical weapon to undermine, damage the reputation of or sabotage the business continuity of their main competitors through defamation or the fabrication of tax data.

To counter such criminal motives, the tax regulations governing the scheme must include provisions on severe legal and financial reverse-penalty clauses against false reporters. In this way, the rights of honest whistleblowers remain protected, whilst legal certainty for compliant taxpayers is not sacrificed in pursuit of short-term revenue targets.

Projected Net Tax Potential

To assess the economic viability of this proposal, a mathematical projection simulation can be constructed using a moderate approach, based on Indonesia's 2025 nominal GDP recorded at IDR22,139 trillion. If this whistleblower incentive-based supervision instrument is assumed to be capable of identifying and drawing just 2% of the total value of the underground economy into the formal administrative system, the volume of newly exposed tax base would reach IDR442.78 trillion.

Applying an assumed combined effective rate (the accumulated VAT and income tax rate) of 11% on the newly disclosed taxable objects, the tax authority could potentially secure a gross revenue potential of IDR48.71 trillion. Under the scheme, if reporting taxpayers are granted a direct tax incentive of 20% of the verified tax recovery value, the incentive budget allocation, which is converted into a reduction of the reporting party's tax liability, would amount to IDR9.74 trillion.

Through this calculation, the state treasury would continue to obtain a highly significant additional net tax potential of IDR38.97 trillion. This massive return on investment is achieved at very minimal compliance cost to the DGT, given that the entire burden of providing initial material evidence and preliminary investigation has been "delegated" voluntarily to market participants.

Adopting Sun Tzu's thinking into the architecture of modern taxation through a whistleblower tax incentive scheme is an innovative step towards breaking through Indonesia's fiscal impasse. By creating an ecosystem in which taxpayers naturally encourage one another's compliance, the government can significantly erode the size of the shadow economy without the need to excessively expand the bureaucratic oversight structure.

Ultimately, this strategy is not only effective in recovering the state's net revenue potential by tens of trillions of rupiah, but also upholds healthy competitive fairness for all entrepreneurs across the country. (dik)