Tax Incentive Partnership Aims to Upgrade UMKM

The Indonesian government announced a plan to draft a new fiscal tax incentive formula that links partnerships between corporations and UMKM. The proposal was presented in late October 2025 and aims to enhance UMKM’s role in the economy.

UMKM account for 99.99% of domestic taxpayers, contribute over 60% of GDP and employ 97% of the workforce, yet their participation in global value chains is only 4.1%. Earlier incentives such as final income tax (PPh final) for UMKM and People’s Business Loans (KUR) have been deemed insufficient to spur partnerships. Law No 6/2023 and BKPM Regulation No 1/2022 require medium and large firms to partner with UMKM and offer regional tax reductions as rewards.

Under the new formula, companies could receive tax reductions like tax allowance or super deduction proportional to their contribution to UMKM development. This is expected to raise UMKM revenues, broaden the tax base, and increase formal employment. The government plans a phased rollout, starting with integration into the Online Single Submission (OSS) system and later issuing dedicated partnership regulations.