Indonesia Options in Reviewing the Value Added Tax (VAT) System Policy With Estonia as the Most Competitive Country in the World

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Pontianak— Indonesia Reviews VAT Policy Options by Learning from Estonia’s World-Leading Tax System. Research conducted by Novita (Widya Dharma University Pontianak) published in January 2026 in the International Journal of Management Analytics (IJMA).

The research conducted by Novita offers a broader perspective: the issue of VAT is not only about rates, but also about the efficiency of the collection system, digitization, and administrative convenience. This study compares Indonesia's VAT system with that of Estonia, a country named as having the most competitive tax system in the world.

VAT Is a Major Revenue Engine, Not a Minor Tax Tool

Novita highlights that VAT plays a critical role in state finances. Based on OECD data, VAT contributes roughly 22% of total tax revenue in OECD member countries, showing that VAT is one of the strongest pillars of government funding.

In Indonesia, taxes account for around 80% of total state revenue, making VAT policy changes politically sensitive. The government’s VAT adjustment is widely framed as a long-term effort to strengthen fiscal capacity, reduce budget deficits after the COVID-19 pandemic, and expand space for development spending.

However, the public reaction remains mixed. Many people—especially low-income households—fear VAT increases will raise the prices of goods and services, weakening purchasing power. Even though essential sectors such as food, health, education, and social services are exempt, secondary and tertiary consumption can still be heavily affected.

Why Estonia Matters in the VAT Debate

Estonia offers a striking comparison. Despite having a higher VAT rate—22%, with plans to increase to 24% in early 2026—Estonia still ranked first in the 2024 International Tax Competitiveness Index (ITCI).

Estonia’s system is not considered a “tax haven.” Instead, it is known for being:

clear and predictable,
digitally integrated,
efficient in administration,
supported by strong tax treaties (62 treaties).

The Estonian government’s VAT policy is also linked to broader fiscal goals. If state revenue exceeds expectations, Estonia has discussed strengthening defense spending or reducing the burden of personal income tax.

How the Study Was Conducted

Novita’s research uses a qualitative comparative approach, relying on a systematic literature review. The data was collected from internet-based sources, including:

academic journals,
policy reports,
government publications,
legal and regulatory documents.

Instead of using surveys or statistical regression, the study focuses on comparing two national VAT systems across three major dimensions:

Policy and legal structure (VAT law, rates, exemptions)
Collection and administrative mechanisms (registration, filing, refunds, audits)
Digitalization and efficiency (technology, automation, compliance tools)

Estonia’s VAT System: Digital, Automated, and Fast

Estonia introduced VAT in 1991 as part of its transition to a market-based economy. The system is governed by the Value Added Tax Act (2002) and managed by the Estonian Tax and Customs Board (ETCB).

One of the most striking points in the paper is how Estonia built VAT efficiency through full digital integration. Businesses use the e-Tax/e-MTA platform, which allows taxpayers to:

file VAT returns electronically,
make tax payments online,
access real-time tax information,
automatically cross-check invoice and transaction data.

The system also supports automatic matching between input and output invoices. This helps detect inconsistencies early, reducing fraud risks such as carousel VAT fraud. As a result, Estonia achieves extremely high compliance and low administrative costs.

Indonesia’s VAT System: Progressing, but Still Fragmented

Indonesia’s VAT was introduced through Law No. 8 of 1983, later amended under Law No. 7 of 2021 on the Harmonization of Tax Regulations. The VAT system is managed by the Directorate General of Taxes (DGT) under the Ministry of Finance.

Indonesia currently applies a standard VAT rate of 11%, with policy adjustments that raise VAT to 12% specifically for luxury goods in 2025.

Indonesia has made important progress in tax digitalization through the e-Faktur system, introduced in 2014. The system enables registered taxpayers to:

issue electronic VAT invoices,
validate invoices digitally,
submit periodic VAT returns,
report transactions to the DGT.

However, Novita notes that Indonesia still faces persistent challenges, including:

slow VAT refund processing (sometimes taking months),
limited integration across digital platforms,
uneven digital literacy, especially among SMEs,
continued reliance on manual audits and oversight.

Key Comparison: Estonia vs Indonesia in One Snapshot

The study summarizes the differences clearly:

Estonia

VAT system: fully digital (e-Tax/e-MTA)
invoice verification: automatic and real-time
compliance: above 95%
VAT refunds: under 30 days
administrative cost: among the lowest in the EU

Indonesia

VAT system: semi-digital (e-Faktur, partial integration)
invoice verification: cross-checks still require manual processes
compliance: around 75–80%
VAT refunds: can take several months
administrative cost: relatively high due to complex procedures

The Big Lesson: Digital Integration Beats Tax Rate Debates

One of the strongest messages from the study is that VAT performance is not determined by tax rates alone.

Estonia proves that a country can maintain a higher VAT rate while still being globally competitive, as long as the system is:

simple,
automated,
transparent,
user-friendly.

Indonesia, meanwhile, has a lower VAT rate but faces bigger administrative burdens because:

the system is more complex,
digital platforms are not fully unified,
taxpayers face higher compliance costs.

Novita emphasizes that Estonia’s success comes not from strict enforcement alone, but from a combination of trust, convenience, and digital governance.

Policy Recommendations for Indonesia

Based on the comparative findings, Novita proposes several practical options Indonesia can consider:

1. Build a Unified Digital Tax Ecosystem

Indonesia is encouraged to develop a single integrated platform that combines VAT, income tax, and withholding tax reporting—similar to Estonia’s e-MTA system.

2. Simplify VAT Regulations

Reducing exemptions, special treatments, and complicated procedures can lower compliance costs and improve voluntary compliance.

3. Accelerate VAT Refund Processing

Automation in refund verification could shorten refund times and improve business cash flow.

4. Strengthen Fraud Detection Through Analytics

Investment in data analytics and AI-based monitoring tools could help detect suspicious transactions more efficiently and reduce VAT fraud.

5. Improve Taxpayer Digital Literacy

Support programs for SMEs are essential so taxpayers can fully adopt digital systems like e-Faktur.

Why This Research Matters for the Public

For everyday citizens, VAT changes often feel like “prices are going up,” and the debate quickly becomes emotional. Novita’s study helps shift the discussion into a more practical direction: how tax systems can be made more efficient and fair without relying solely on rate increases.

For businesses, especially SMEs, the findings highlight that VAT policy is not just about paying tax—it is also about how costly and time-consuming compliance can be.

For policymakers, Estonia serves as a strong benchmark showing that digital integration is not a luxury, but a key driver of tax competitiveness and public trust.

Author Profile

Novita - Universitas Widya Dharma Pontianak

Research Source

Novita “Indonesia Options in Reviewing the Value Added Tax (VAT) System Policy With Estonia as the Most Competitive Country in the World” International Journal of Management Analytics (IJMA) Vol. 4 No. 1 (Januari 2026), hlm. 63–74

DOI:https://doi.org/10.59890/ijma.v4i1.252

URL resmi: https://dmimultitechpublisher.my.id/index.php/ijma