The government has once again granted an incentive in the form of an exemption from Income Tax (PPh) Article 21 in 2026. The incentive applies to certain employees in selected industries, with a fixed gross monthly income of up to IDR 10 million for permanent employees or up to IDR 500,000 per day for non-permanent employees, with PPh Article 21 borne by the government.
A lecturer from the Department of Accounting, Faculty of Economics and Business Universitas Gadjah Mada (FEB UGM), Dr. Rijadh Djatu Winardi, views the policy of exempting PPh Article 21 for workers in strategic sectors as a well-targeted fiscal measure and a form of tax justice and economic equalization. According to him, this instrument directly affects workers’ real income without adding to business costs.
“In the context of labor-intensive sectors that are currently under pressure, this policy functions as an income cushion while also maintaining labor market stability,” he explained on Wednesday (14/1/2026) at FEB UGM.
Boosting Purchasing Power
Rijadh stated that the PPh Article 21 exemption has the potential to boost household purchasing power, especially among middle- to lower-income workers who tend to have a high propensity to consume. However, he emphasized that this policy is not a direct response to the increase in the Value Added Tax (VAT) rate to 12 percent.
“It needs to be clarified that the 12 percent VAT increase only applies to goods subject to the Luxury Goods Sales Tax (PPnBM). Therefore, the main background of this policy is the protection of purchasing power and economic stabilization, not compensation for the VAT policy,” he explained.
The government-borne PPh incentive applies to workers in five sectors: footwear, textiles and apparel, furniture, leather and leather goods, and tourism. Rijadh assessed that these sectors were selected due to their labor-intensive nature, high vulnerability to economic cycles, limited ability to pass costs on to prices, and significant multiplier effects on consumption and employment.
“With this incentive, the fiscal instrument is relatively efficient in maintaining workers’ income stability and preventing deeper economic contraction in these sectors,” said the Secretary of the Master of Accounting Program at FEB UGM.
Rijadh acknowledged the potential for perception inequality, as the incentive is only provided to five labor-intensive sectors. Therefore, policy communication is crucial so that the public understands that the government is prioritizing sectors with the highest risks of layoffs and income decline. Meanwhile, for workers in other sectors, the government can utilize broader instruments such as social spending or MSME support. The challenge lies in communicating that the PPh Article 21 incentive is temporary so as not to create permanent expectations.
Limited Deficit Risk
From a fiscal perspective, Rijadh assessed that the risk to the budget deficit resulting from the PPh Article 21 incentive is relatively limited. It is because the value of the incentive is smaller compared to the total tax expenditure, which primarily consists of VAT and PPnBM incentives.
“What the government needs to be cautious about is the accumulation of various tax incentives without adequate evaluation of their effectiveness, as this could erode the national revenue base,” he stressed.
According to data from the Ministry of Finance’s Directorate General of Economic and Fiscal Strategy, total tax expenditure is expected to reach approximately IDR 563.6 trillion in 2026. Of this amount, the most significant portion is still dominated by VAT and PPnBM incentives, whether in the form of exemptions, zero rates, or taxes borne by the government.
“Thus, in aggregate, pressure on the budget deficit is more significantly determined by VAT and PPnBM tax expenditure policies than by the PPh Article 21 incentive,” he said.
He added that from a macro-fiscal perspective, the PPh Article 21 incentive is more appropriately viewed as a temporary reallocation of tax revenue into additional purchasing power for the public, rather than as a surge in structural government spending. As long as this policy remains temporary and targeted at labor-intensive sectors, its implications for the budget deficit can be managed in a controlled manner.
Multiplier Effect
From a macroeconomic standpoint, he continued, the PPh Article 21 incentive has a relatively high multiplier effect because it directly increases disposable income for workers in the five targeted sectors. These groups have a high propensity to consume, meaning that the additional income received is likely to be reinvested in the economy through household spending. Within this framework, part of the lost PPh revenue may be indirectly compensated through increased economic activity and an expanded consumption tax base.
Rijadh emphasized that the large scale of tax expenditures necessitates sharper fiscal policy direction. High dependence on VAT and PPnBM incentives risks creating greater deficit pressure if not accompanied by evaluations of effectiveness and targeting accuracy. Therefore, the government’s main challenge does not lie solely in the PPh Article 21 incentive, but rather in managing the overall tax expenditure scheme so that economic growth is maintained without undermining revenue sustainability.
“In the future, the government needs to combine more targeted and adaptive fiscal policies. Tax incentives should remain temporary, data-driven, and regularly evaluated, accompanied by strengthened productive spending, well-targeted social protection, and medium-term tax base expansion so that economic stabilization does not come at the expense of fiscal sustainability,” Rijadh concluded.
Reported by: Kurnia Ekaptiningrum
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