The government has confirmed that a reform in regional income tax distribution will take effect in 2026. This change focuses on employee income tax under Article 21 and shifts the basis of tax allocation from company location to employee residence. Officials expect the new system to create a fairer and more balanced sharing of revenue across Indonesian regions.
Shift from Company Location to Worker’s Domicile
Currently, Article 21 income tax is distributed based on where the company deducts it. This setup often benefits big cities with many offices, even when most workers live outside those cities. The new plan will redirect the tax to the region where employees reside.
Deputy Finance Minister Anggito Abimanyu confirmed the change during a session at the Parliament Complex. “The target is 2026,” he said. He explained that the Ministry of Finance is still developing a system to map Article 21 taxes by domicile. According to Anggito, “We are mapping Article 21 based on domicile.”
This approach aims to ensure that smaller cities and towns receive their share of revenue when their residents contribute to national taxes, regardless of where they work.
Benefits of Regional Income Tax Distribution
The government argues that regional income tax distribution will strengthen fairness. Regions where employees live will see direct benefits from the tax revenues generated by their residents. This shift is expected to boost local government budgets and allow for more targeted spending on infrastructure, education, and public services.
Anggito emphasized that the reform responds to concerns raised by members of the Regional Representative Council. He stated, “Hopefully, this will be fairer and meet the aspirations of DPD members who want the income tax from employees to be shared based on domicile.”
By channeling tax revenue back to the areas where workers live, the policy will help create more balanced growth across provinces and municipalities.
Legal Basis and Current Revenue-Sharing Mechanism
At present, Law No. 1 of 2022 on Financial Relations between the Central and Regional Governments and Ministerial Regulation No. 202/PMK.07/2013 guide the revenue-sharing model. The rules allocate 20 percent of state income tax revenue to regions.
The breakdown includes 7.5 percent for the province, 8.9 percent for the producing regency or city, and 3.6 percent for other regencies or cities in the same province. This distribution has long favored regions where large companies are located, leaving commuter-heavy areas at a disadvantage. The upcoming reform under the Indonesia tax sharing system seeks to address that imbalance.
Alternative Views on Tax Reform
Not all experts agree with the government’s chosen path. Bhima Yudhistira, Executive Director of the Center of Economics and Law Studies (CELIOS), suggested an alternative approach. He argued that raising the non-taxable income threshold (PTKP) could provide more immediate benefits.
According to Bhima, higher PTKP would allow workers to keep more of their earnings, thereby increasing disposable income. He explained that greater purchasing power would stimulate local economies directly. This method, he argued, could achieve growth without restructuring a complex revenue-sharing model. His perspective highlights that there are multiple ways to pursue fairer tax revenue allocation.
What Regions Can Expect by 2026
When the new scheme begins in 2026, regions can expect tax revenue to reflect where their populations actually live, not just where they work. Local governments in suburban and rural areas stand to benefit the most, as they often supply labor to larger cities without seeing a proportional return in tax revenue.
Anggito clarified that this change only applies to individual income tax. “For corporate income tax, it is not shared. Wherever it is collected, it does not affect the sharing aspect,” he said. This ensures that the focus remains on fairness for workers and their communities.
The government continues to prepare the technical details of the reform. Anggito assured lawmakers, “It is being worked on. Yes, this is for 2026.”
Toward a Fairer System for All Regions
The shift in regional income tax distribution marks a major policy change for Indonesia. By 2026, the government expects a more equitable system that directs tax benefits to where people live. While experts debate alternative strategies, the reform underscores the government’s commitment to fairer growth and balanced development across the nation. Success will depend on smooth implementation and cooperation between central and regional authorities.
Source: cnbcindonesia.com, merdeka.com
Image: Getty Images
