Average Effective Tax Rate Paradox

Tax simplification has long been viewed as a path toward administrative efficiency. Yet in practice, simplicity on paper does not always translate into ease in implementation. The introduction of the Average Effective Tax Rate (Tarif Efektif Rata-Rata/TER) for Article 21 Income Tax reflects this paradox. Launched through Minister of Finance Regulation (PMK) No. 168/PMK.03/2023 and implemented under Director General of Taxes (DGT) Regulation No. Per-2/PJ/2024, the TER mechanism was designed to streamline withholding tax procedures and administration. However, its application has since opened new discussions on fairness, accuracy, and the true meaning of simplification.

Since its enforcement in 2024, the TER mechanism, which was initially introduced as a breakthrough to reduce administrative burdens, has instead triggered a surge in refund claims and raised concerns among taxpayers. According to the data from the Ministry of Finance, overpayments under Article 21 Income Tax reached approximately IDR 16.5 trillion by the end of 2024. This may highlight a key lesson that, simplification, if not properly calibrated to income variability may inadvertently create new layers of complexity rather than resolving existing ones.

Initial Purpose

The TER mechanism was introduced as part of the government’s initiative to simplify the calculation and withholding process for employee income tax. By applying a fixed average effective rate, employers no longer need to perform detailed progressive tax calculation each month or every employee. The system was intended to improve administrative efficiency, especially for companies with large and diverse workforces, while maintaining alignment with Indonesia’s income tax principles.

In practice, however, several mismatches emerged. Employee income structures in Indonesia are highly diverse, covering base salaries, allowances, bonuses, overtime pay, and other elements that may vary and fluctuate throughout the year. This challenge lies not in the rate itself, but in the withholding approach, which has not fully adapted to these dynamic income patterns.

For employees with fluctuating income or changes in employment status during the fiscal year, applying a uniform TER often leads to over withholding in the earlier months. Consequently, significant number of employees become eligible for tax refunds at the end of the year. This structural mismatch is the primary driver behind the overpayments reported by the Ministry of Finance.

Government Response

In response, the Ministry of Finance has announced plans to conduct a comprehensive review of the TER framework. This initiative serves both as a technical evaluation and as a strategic reflection on the policy’s relevance amid evolving income patterns and the growing digitalization of tax administration.

As of late 2025, the government remains in the evaluation stage and has yet to determine whether the TER mechanism will be retained, modified or replaced. The Ministry of Finance emphasized that any final decision will be informed by professional insights to ensure that future policies remain balanced and responsive.

The ongoing review of the TER policy represents an important step toward aligning Indonesia’s tax administration with the dynamics of its modern, digitalized workforce. The ultimate objective is not merely to simplify compliance but also to ensure that the system fairly and accurately reflects taxpayers’ true income conditions.

By refining the TER framework, the government aims to strengthen both administrative efficiency and taxpayers’ trust, creating a system that is simpler in form yet more precise in substance. And if implemented effectively, will help to establish a stronger foundation for fair, equitable and adaptive taxation to support Indonesia’s transition towards a more data-driven and digitally integrated tax ecosystem. (Shintya)