The Non-Taxable Income Increase and 8% Economic Growth
Daffa Abyan
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President Prabowo Subianto's eight percent economic growth target sounds like a grand ambition. Indeed, if achieved, Indonesia's economic growth would return to levels not seen since before the 1998 economic crisis.
During that era, the national economy was bolstered by surging investment, the expansion of the manufacturing industry, and robust domestic consumption. However, today's economic context is far more complex. Massive global uncertainty, international trade fragmentation, and post-pandemic fiscal pressures mean the path to that figure is no longer linear.
In Indonesia's current economic structure, household consumption still accounts for more than half of the Gross Domestic Product (GDP). This means the most rational way to accelerate the growth rate lies in the public's ability to spend more.
Without a push from the demand side, investment and real sector expansion will find it difficult to move aggressively. It is at this point that fiscal policy plays a strategic role, not just as an instrument for state revenue, but also as a lever to boost domestic demand.
The Option of Expanding the Non-Taxable Income Threshold (PTKP)
One policy option that deserves serious consideration is an adjustment to the Non-Taxable Income Threshold (PTKP). PTKP refers to the portion of an individual’s income that is exempt from income tax. As such, PTKP has a direct impact on people’s disposable income, particularly among formal-sector workers.
When the tax burden is lighter and spending capacity increases, consumption tends to grow organically. This effect is not instantaneous but layered. Higher household spending encourages production, expands employment opportunities, and ultimately strengthens the tax revenue base itself.
PTKP and the Cost of Living
An increase in PTKP would signal the government’s commitment to improving public welfare. In other words, Indonesia’s economic growth would be driven more strongly from the demand side.
A tax expenditure report released by the Ministry of Finance shows that tax incentives are still predominantly allocated to the business sector rather than to households. In 2023, for example, only 42% of tax expenditures were directed toward households or individual taxpayers, with the remainder allocated to businesses or corporate taxpayers.
For Individual Taxpayers (WPOP), the PTKP value is a vital variable in determining how much income they actually take home—their take-home pay. This is because the PTKP eliminates a portion of their earned income from the calculation of taxable income.
In fact, Article 6, Paragraph 3 of the Income Tax Law implicitly treats PTKP as a reflection of basic living necessities, based on the cost of living for a taxpayer and their dependents.
However, in reality, the current PTKP value has not kept pace with the rising prices of goods and services. Consequently, the PTKP is no longer equivalent to today's daily cost of living.
The current PTKP formula has been in use for nearly nine years, ever since the government issued Ministry of Finance Regulation (PMK) Number 101 of 2016, which took effect on January 1, 2016.
The current PTKP amount is determined by two variables: marital status and the number of dependents. For a single individual, the applicable PTKP is Rp54 million per year. If married, this increases to Rp58.5 million per year. Furthermore, for every additional dependent, whether a child or a parent, there is an additional PTKP allowance of Rp4.5 million, with a maximum of three dependents.
Eroding the Tax Base
Although this policy is popular with the public, it is not viewed the same way by the OECD. According to the Paris-based organization, governments are instead encouraged to lower the PTKP threshold. The rationale is clear: reducing PTKP would broaden the tax base and increase revenue.
This is because a lower PTKP would expand the segment of the population subject to income tax, particularly Income Tax Article (ITA) 21, which is withheld from employees’ salaries.
On the other hand, increasing PTKP would reduce potential state revenue from income tax, both from ITA 21 collected through withholding and from individual taxpayers’ annual income tax filings.
The argument that raising PTKP does not automatically translate into higher economic growth through increased purchasing power may be one of the reasons why the PTKP level has not been adjusted to date.
The Snowball Effect
However, the OECD study seems to overlook one important factor. Indonesia is the world’s fourth most populous country, with a population dominated by the lower-middle-income class (66.35%). This group accounts for as much as 81.49% of domestic consumption.
Any additional purchasing power they gain from an increase in the PTKP would generate a significant snowball effect on the economy. This is because higher income is directly proportional to higher consumption, especially among households as end consumers.
This would have a positive impact on Value Added Tax (VAT) revenue, as households ultimately bear the VAT burden and cannot claim a credit for it.
Beyond VAT, stronger consumption activity would be reflected in improved corporate financial performance and higher corporate income tax payments. The increase in these two types of taxes would likely be sufficient to compensate for the loss of revenue from employees’ Income Tax Article (ITA) 21.
Moreover, improved corporate performance can encourage greater investment. Therefore, the author hopes that this idea or proposal can be considered as a way to boost economic growth without sacrificing state tax revenue. (ASP/KEN)
Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.
