In a major move to support labor income and stimulate economic activity in Indonesia, the government led by Finance Minister Purbaya Yudhi Sadewa has announced that employees earning up to Rp10 million per month in specified industries will be exempted from income tax (PPh Pasal 21) for the entire year of 2026. This policy forms part of a broader fiscal stimulus package aimed at maintaining purchasing power and addressing socio-economic stability amid global economic uncertainties.

The tax exemption for employees in key sectors 2026 is expected to benefit millions of workers in labor-intensive fields, reduce their tax burden, increase disposable income, and support domestic consumption, which remains a key pillar of Indonesia’s economic growth strategy.

This article provides a thorough, data-driven analysis of the policy, its eligibility criteria, projected fiscal impact, sectoral implications, broader economic context, and potential long-term effects on productivity and labor markets.

Understanding the Tax Exemption for Employees in Key Sectors 2026

The Indonesian government has formalized the tax exemption policy in Peraturan Menteri Keuangan (PMK) Nomor 105 Tahun 2025, which takes effect on January 1, 2026. Under this regulation, PPh Pasal 21, which normally applies to employee income, will be borne by the government (DTP) for qualified workers in selected industries.

The tax exemption applies to both permanent and non-permanent employees earning a gross monthly salary of not more than Rp10 million, or in the case of non-permanent workers, an average daily wage of no more than Rp500,000. These thresholds ensure the policy targets workers in middle- to lower-income brackets, preserving their purchasing power throughout 2026.

The eligible workers must hold either a Tax Identification Number (NPWP) or a Population Identification Number (NIK) that is integrated into the Directorate General of Taxes administration system. The incentive covers all fixed and regular gross income within the year, including base salary, allowances, and similar periodic compensation.

Which Sectors Are Covered Under the Policy?

The government has designated five labor-intensive sectors as eligible for the tax exemption program:

1. Footwear industry
2. Textile and garment industry
3. Furniture manufacturing
4. Leather and leather goods production
5. Tourism sector (including hospitality and related services)

These sectors were chosen based on their significant employment contributions and their role in absorbing a large portion of the Indonesian workforce. For example, prior labor statistics indicate that the textile and footwear industries collectively employ millions of Indonesians, particularly in smaller cities and towns where formal sector jobs are critical for household stability.

By targeting these sectors, the government aims to support around 5 to 7 million workers whose incomes are commonly below the Rp10 million threshold, though exact official beneficiary estimates for 2026 have not yet been disclosed.

The Economic Rationale Behind the Government Policy

The tax exemption initiative reflects a deliberate fiscal strategy to address several macroeconomic challenges:

Enhancing Disposable Income and Domestic Consumption

One of the core goals of the policy is to increase workers’ disposable income. By removing PPh 21 obligations for salaried workers up to Rp10 million per month, families retain more of their earnings. This is expected to boost consumer spending on goods and services, which historically constitutes more than 55 percent of Indonesia’s GDP. Higher consumption can help support sectors that rely on domestic demand, especially during global slowdowns.

Supporting Employment in Labor-Intensive Sectors

Industries such as footwear, textiles, and furniture are labor-intensive and contribute significantly to formal employment. These sectors have also faced pressure from rising input costs, global competition, and currency volatility. Tax relief on employee income not only eases financial strain on workers but may also reduce labor cost burdens on employers, making these industries more competitive and helping preserve jobs.

Stabilizing Social Welfare and Household Finances

The tax exemption policy is part of a broader stimulus designed to stabilize household finances amid inflationary pressures. Consumer price trends in late 2025 and early 2026 have shown persistent increases in core goods, adding urgency to policies that protect purchasing power. By subsidizing employee tax burdens, the government aims to prevent further erosion of real incomes.

Stimulating Economic Activity Without New Tax Rates

The policy aligns with statements from Minister Purbaya and fiscal policymakers that the government does not intend to introduce new taxes or raise tax rates while seeking higher economic growth. This approach encourages fiscal expansion through incentives rather than new tax obligations.

Fiscal Implications and Government Budget Considerations

While the policy is expected to benefit millions of workers, it also carries considerable fiscal implications. The government must allocate budgetary resources to cover the tax revenue forgone through this subsidy. Estimated budget considerations include:

• Tax revenue loss mitigation: If an estimated 6 million workers qualify for the exemption, and each pays an average PPh 21 of Rp600,000 annually, the total foregone revenue could be around Rp3.6 trillion. This figure is illustrative and depends on actual salary distributions and employment numbers.
• Budget allocation for 2026 stimulus: The exemption forms part of a broader fiscal stimulus program, which may include other tax incentives, subsidies, and social safety net expansions. Coordinated budget planning seeks to balance economic support with fiscal sustainability.

Fiscal analysts are monitoring the policy’s impacts as the Indonesian government projects conservative tax revenue growth amid ambitious GDP targets for 2026.

Potential Effects on Labor Market and Business Competitiveness

The tax exemption program is expected to have both immediate and medium-term effects on labor markets and business sectors:

Labor Market Effects

By reducing the effective tax burden on workers, the policy may improve job satisfaction, reduce turnover, and stimulate greater workforce participation in formal sectors. It also provides an incentive for informal sector workers to transition to formal employment, where tax benefits and legal protections are available.

Business Competitiveness

Employers in eligible sectors might experience indirect benefits if the tax exemption increases consumer demand for their products. Reduced tax liabilities for workers can translate into higher spending on goods such as apparel, footwear, and furniture, potentially leading to greater sales and production activity.

However, employers must comply with documentation requirements, such as ensuring employees have valid tax identification numbers and are correctly classified under eligible sectors.

Broader Economic Context and Growth Strategy

Indonesia’s economy has shown resilience in recent quarters, with macroeconomic policymakers targeting growth above 5 percent in 2026 driven by domestic consumption, public investment, and fiscal incentives. The tax exemption is part of a larger economic policy mix, including:

• Tax incentives for micro, small, and medium enterprises (MSMEs)
• Social safety net expansions
• Targeted subsidies for key industries
• Continued provision of other fiscal facilities like tax holiday and super tax deductions for research and investment

By focusing on consumption-driven growth and employment subsidies, the government seeks to sustain momentum without undermining long-term fiscal health.

Challenges and Implementation Considerations

While the tax exemption for employees in key sectors 2026 is expected to deliver broad benefits, several challenges could affect implementation and outcomes:

Administrative Compliance

Employers must accurately report employee income and ensure integration with the tax identification system. The Directorate General of Taxes will need efficient oversight to prevent misuse or incorrect classification.

Sector Coverage and Worker Awareness

Ensuring that eligible workers in all designated sectors are aware of and benefit from the exemption is essential. Communication strategies and employer compliance will shape policy effectiveness.

Economic Uncertainty

External economic headwinds, such as global slowdowns or currency volatility, could influence consumption patterns, potentially affecting the expected positive impact of tax exemptions.

Conclusion: A Strategic Move to Boost Worker Welfare and Economic Growth

The tax exemption for employees in key sectors 2026 represents a targeted fiscal policy designed to support labor income, boost consumption, and strengthen the resilience of labor-intensive industries. By eliminating PPh 21 for workers earning up to Rp10 million per month, the Indonesian government aims to enhance disposable income, stabilize household finances, and contribute to broader economic growth goals in a challenging global environment.

With millions of workers poised to benefit and sectors positioned to see increased demand, this exemption is a significant step in Indonesia’s economic policy toolkit for 2026.