Tax avoidance has long been a major concern in Indonesia, particularly in the manufacturing sector, which contributes heavily to national revenue. When companies reduce their tax payments through aggressive strategies, the consequences extend beyond corporate balance sheets. Public services lose funding, economic fairness is weakened, and trust between businesses and society declines. As Indonesia modernizes its economy and strengthens sustainability policies, understanding how corporate practices influence tax compliance has become increasingly urgent.
How Transparency and Technology Influence Tax Behavior
The research team at Surabaya State University analyzed financial, sustainability, and annual reports from 50 manufacturing companies listed on the Indonesia Stock Exchange between 2020 and 2024. This produced 250 firm-year observations, providing a detailed picture of corporate behavior over time.
The researchers examined three key factors:
- ESG disclosure, which reflects how openly companies report their environmental, social, and governance practices
- Digital transformation, including adoption of cloud systems, digital reporting, and enterprise software
- Firm size, measured by total assets
They then compared these factors with each company’s effective tax rate, a widely used indicator of tax avoidance. A lower effective tax rate generally indicates more aggressive tax reduction strategies.
Key Findings: ESG and Digitalization Reduce Tax Avoidance
The results revealed clear and consistent patterns.
1. ESG disclosure significantly reduces tax avoidance
Companies that shared more detailed ESG information were less likely to minimize their tax obligations aggressively.
The statistical analysis showed:
- ESG disclosure had a negative and significant effect on tax avoidance
- Companies with higher ESG transparency paid taxes more responsibly
This suggests that public accountability plays a powerful role in shaping corporate financial behavior.
According to Dr. Rika Nur Widiastutik of Surabaya State University, ESG disclosure increases scrutiny from stakeholders, which discourages companies from adopting aggressive tax strategies.
2. Digital transformation also improves tax compliance
Companies investing in digital systems showed lower levels of tax avoidance.
Examples of digital transformation included:
- Electronic tax reporting systems
- Enterprise resource planning (ERP) software
- Cloud-based financial platforms
- Automated accounting tools
These technologies improve transparency and make it harder to manipulate financial data.
The analysis confirmed that digital transformation had a statistically significant negative relationship with tax avoidance.
3. Larger companies show stronger compliance effects
Firm size played an important role in strengthening the impact of ESG and digitalization.
The study found:
- Larger firms experienced greater reductions in tax avoidance
- Smaller firms showed weaker effects
This difference reflects the higher public visibility and regulatory scrutiny faced by larger corporations.
Why ESG Disclosure Discourages Tax Avoidance
The findings show that ESG reporting is more than a public relations exercise. It directly affects financial decisions.
Companies that publish ESG reports signal their commitment to social responsibility. Engaging in tax avoidance would contradict those commitments and risk damaging their reputation.
The research explains that ESG disclosure acts as a governance mechanism by increasing transparency and accountability. This makes aggressive tax strategies more costly from a reputational standpoint.
In practical terms, companies that want to maintain public trust are more likely to comply with tax regulations.
Digital Technology Strengthens Financial Transparency
Digital transformation also plays a critical role.
When financial systems are digitized:
- Transactions become easier to track
- Financial reports become more accurate
- Regulators can monitor corporate activities more effectively
This reduces opportunities for tax avoidance.
Dr. Rika Nur Widiastutik and her Surabaya State University colleagues explain that digital systems reduce information gaps between companies and regulators, making tax compliance more likely.
Indonesia’s adoption of electronic tax systems, such as e-filing and digital reporting platforms, has reinforced this effect.
Implications for Government, Businesses, and Investors
The study provides important insights for policymakers, business leaders, and investors.
For government
Encouraging ESG reporting and digital transformation can strengthen tax compliance and increase public revenue.
Policies that support corporate transparency and digital adoption may help reduce tax avoidance nationwide.
For businesses
Companies can improve their reputation and regulatory standing by investing in ESG disclosure and digital systems.
These practices not only improve compliance but also build long-term trust with stakeholders.
For investors
ESG disclosure and digital transformation can serve as indicators of responsible corporate governance.
Companies with strong ESG and digital practices may present lower regulatory and reputational risks.
Larger Companies Lead the Way
Firm size emerged as a key factor in determining effectiveness.
Large companies benefit more from ESG and digital transformation because they have:
- More resources to invest in technology
- Greater public visibility
- Higher regulatory scrutiny
Smaller firms may face limitations in implementing advanced systems.
However, the researchers note that expanding digital access and ESG adoption among smaller companies could improve compliance across the entire economy.
Strengthening Sustainable and Fair Business Practices
Overall, the research highlights the growing importance of transparency and technology in shaping corporate ethics.
Dr. Rika Nur Widiastutik of Surabaya State University concludes that ESG disclosure and digital transformation function as governance tools that promote responsible tax behavior and corporate accountability.
These findings are particularly relevant as Indonesia continues modernizing its economy and strengthening sustainability standards.
Encouraging responsible corporate behavior not only improves tax compliance but also supports long-term economic stability.
Author Profile
Dr. Rika Nur Widiastutik, SE, M.Si, is a researcher and lecturer at Surabaya State University (Universitas Negeri Surabaya), Indonesia. Her expertise includes financial accounting, corporate governance, sustainability reporting, and tax behavior. Her research focuses on how transparency and digital transformation influence corporate financial decisions and accountability.
Source
Widiastutik, Rika Nur, Bayu Rama Laksono, Ratu Aghnia Raffaidy Wiguna, Ika Swasti Putri, Nur Rizki Wijaya, Az Zahwa Firstania Raizkha Faradanty, and Refansyah Ataullah. 2026.
“How ESG Disclosure and Digital Transformation Can Reduce Tax Avoidance? The Role of Firm Size as a Moderator in Indonesian Manufacturing Firms.”
International Journal of Management and Business Intelligence.
DOI: https://doi.org/10.59890/ijmbi.v4i1.314
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