Indonesia’s Hidden Tax Challenge: Can Better Banking and Digital Payments Unlock More Revenue?

A World Bank study reveals that Indonesia’s weak financial sector, limited banking access, and high borrowing costs contribute to tax evasion and a widening tax revenue gap. The research highlights how affordable credit, digital payments, stronger financial transparency, and improved taxpayer trust could boost tax collections and support sustainable economic growth.

A new study by the World Bank's Fiscal Policy and Growth Global Department, using data from the World Bank, the United Nations University World Institute for Development Economics Research (UNU-WIDER), and the International Labour Organization (ILO), has revealed that Indonesia's weak financial sector is limiting tax collections and reducing government revenue. Published in October 2026, the research, titled Partners on a Climb: Financial Sector Development and Tax Collections in Indonesia, was conducted by Habib Rab, Muhammad Khudadad Chattha, and Beyza Polat. The study finds that limited access to banking, expensive business loans, widespread informal economic activities, and poor financial transparency make tax collection more difficult. It suggests that improving financial services could help Indonesia increase government revenue without depending entirely on higher taxes.

Indonesia's Growing Tax Gap Raises Economic Concerns

Indonesia has struggled to collect enough taxes despite economic growth and expanding business activities. Researchers examined financial and taxation data from 64 high- and middle-income countries and found that Indonesia performs poorly compared with several economies at similar development levels.

The country's estimated tax gap, representing the difference between potential and actual tax collections, reached approximately 6% of GDP in 2018. The study also found that tax collection efficiency has declined over time, meaning economic growth has not produced the expected increase in government revenue.

One important finding is the connection between banking development and tax collection. According to the research, a 1% increase in private sector credit relative to GDP is associated with an approximately 0.2% reduction in the tax gap. Additional analysis suggests the reduction could range between 0.2% and 0.57% after accounting for differences in tax policies and administration.

These findings suggest that stronger financial markets could help governments collect more revenue by making business activities easier to monitor. However, the researchers caution that the results show statistical relationships rather than guaranteed improvements.

Expensive Loans Push Businesses Towards Tax Planning

The study identifies limited access to affordable loans as an important reason businesses may rely on financial practices that reduce their tax payments.

Companies using formal banking services generally maintain financial records, declare assets, and document transactions. These records can help tax authorities identify income and check whether businesses are meeting their obligations.

However, Indonesia's relatively high borrowing costs discourage some businesses from using formal financial services. Companies operating through cash transactions or informal financing arrangements may leave fewer records, making tax enforcement more difficult.

Researchers examined financial information from more than 400 publicly listed Indonesian companies between 2006 and 2022. They found that businesses facing greater investment-related financial difficulties were more likely to reduce their cash tax payments through tax planning.

A one-decile increase in financial constraints was associated with a 0.18 percentage point decline in cash effective tax rates. Among more financially constrained companies, the decline reached approximately 0.59 percentage points.

The findings suggest that companies struggling to secure financing may use tax deductions, payment delays, and other legal planning strategies to preserve cash. Although tax planning is not necessarily illegal, aggressive practices can create compliance concerns.

Digital Banking Could Make Tax Evasion More Difficult

The research also highlights the importance of banking access and digital payments in improving tax compliance.

Using the 2023 World Bank Indonesia Enterprise Survey, which interviewed 2,955 businesses, researchers found that companies accessing formal loans and banking services generally reported stronger tax compliance indicators.

A separate experimental assessment cited in the study estimated that approximately one-quarter of Indonesian firms engage in tax evasion. However, researchers emphasized that access to banking does not automatically cause businesses to become more compliant.

Companies using electronic payments and bank transfers generally reported greater difficulty avoiding taxes because digital transactions create financial records.

Nevertheless, some small businesses deliberately avoid digital payments because they fear increased taxation. Others express concerns about corruption and how governments spend public money.

This reveals an important challenge: expanding banking services may not improve compliance unless businesses also trust the tax system.

Financial Reforms Could Strengthen Indonesia's Economic Future

The study argues that Indonesia must improve financial inclusion alongside tax administration to strengthen government revenue.

A separate World Bank assessment estimates the combined corporate income tax and value-added tax gaps at 6.4% of GDP. Around 42% of this gap is linked to tax policy issues, including exemptions and registration thresholds, while 58% is associated with compliance problems.

Researchers recommend improving access to affordable credit, strengthening financial information sharing, expanding digital payment systems, and removing regulatory barriers that prevent cooperation between banks and tax authorities.

Better financial information could help authorities identify differences between declared income and actual transactions while maintaining appropriate data protection.

For traders and businesses, affordable financing could support investment, improve cash flow, and encourage participation in the formal economy. Consumers could benefit indirectly from stronger public services and improved economic activity.

For policymakers, the findings underline the importance of combining financial reforms with fair taxation, stronger institutions, and public trust.

Indonesia's ability to collect taxes depends not only on tax laws and enforcement but also on how effectively its financial system supports businesses. Stronger banking access, greater transparency, and improved taxpayer confidence could help narrow the revenue gap and support sustainable economic development.