Toll road VAT, EV disincentive: Short-term revenue, long-term losses

As the government seeks to shore up fiscal stability amid slowing tax revenue and rising spending pressures, it is turning to controversial new revenue measures, including imposing VAT on toll roads and removing tax exemptions for EV. These policies could slow adoption even as the country pushes electrification to reduce reliance on costly fuel imports.

The urgency behind these measures is understandable. Indonesia’s 2026 tax revenue target stands at Rp 2.358 quadrillion (US$136 billion), while collections have continued to underperform. In response, the government is expanding the tax base by targeting sectors with strong revenue potential.

The plan to impose VAT on toll roads, as outlined in the 2025-2029 Strategic Plan of the Directorate General of Taxes’ (DJP’s), is backed by legal provisions under the Tax Harmonization Law and has emerged as an obvious candidate. Likewise, regional administrations argue that maintaining tax exemptions for EVs reduces the revenue needed to finance local roads and public infrastructure.

From a fiscal perspective, both policies appear rational. The problem is that fiscal policy does not operate in isolation. Taxing infrastructure designed to reduce costs and eliminating incentives meant to accelerate electrification could generate broader economic losses that outweigh immediate fiscal gains.

These broader risks are most visible in the proposed 11 percent VAT on toll roads. While the government expects the policy to generate an additional Rp 4-5 trillion in annual revenue, many economists argue that this gain is small relative to the wider economic costs. In the context of a budget deficit reaching hundreds of trillions of rupiah, the policy is far from a game changer.

What is more immediate is its impact on logistics costs and household spending. Toll roads are central to the movement of goods and people, particularly for the urban middle class. Higher toll rates are unlikely to be absorbed by operators or logistics firms and will instead be passed along supply chains. This could raise the prices of food, basic goods and other daily necessities, including for consumers who never use toll roads. For middle-income households already grappling with weakening purchasing power and rising costs of living, this is less a tax adjustment than a direct squeeze on affordability.

A similar contradiction appears in the EV disincentive policy. Indonesia has spent years trying to position itself as a regional hub for EV production and adoption, offering tax incentives to attract investment and encourage consumers to shift away from fossil fuel vehicles. Yet the removal of automatic tax exemptions under Home Ministry Regulation No. 11/2026 sends a conflicting signal at a critical stage of that transition.

By allowing local administrations to impose vehicle tax (PKB) and a vehicle ownership transfer fee (BBNKB) on EVs, the policy risks increasing their on-the-road (OTR) prices between 5 and 15 percent, particularly for entry-level battery EVs that have driven recent market growth. Even if the government argues that the overall tax burden remains unchanged, consumers ultimately respond to the final price they must pay up front.

For middle-income consumers and ride-hailing drivers, both of who depend on lower operating costs, higher EV prices and policy uncertainty could delay purchases and weaken confidence in the market. For investors, policy inconsistency is even more damaging. A green transition cannot be built on incentives that disappear just as adoption begins to accelerate.

What makes the toll road and EV policies particularly problematic are not merely the additional tax burden but also the inconsistency they create within the broader economic strategy. For years, the government has promoted toll roads as a solution to Indonesia’s high logistics costs and EVs as a pillar of its green industrial transition, both framed as long-term investments to improve competitiveness, reduce dependence on imported fuel and attract private capital.

Reversing course by taxing toll road access and weakening EV incentives sends the opposite message: that short-term fiscal pressures now outweigh long-term development priorities. This undermines policy credibility, which can be ultimately more damaging than the tax itself. Investors can adjust to higher costs, but they struggle with unpredictable rules. Consumers can accept gradual reform, but not when policies appear inconsistent with the government’s own stated goals.

Fiscal reform is necessary, but not all potential revenue is worth pursuing. Expanding the tax base should not come at the expense of affordability, competitiveness and policy trust.

If the government wants sustainable revenue, it must focus not only on how much it collects but also where the burden falls and what growth may be sacrificed in return.