Finance Minister Purbaya Yudi Sadewa told lawmakers that a key amendment under the law, which reclassified coal from a non-taxable good to a taxable one, has had the unintended effect of turning a major revenue source into a fiscal burden.
Instead of boosting state income, the shift has forced the government to reimburse large amounts of value-added tax (VAT) to coal producers, leaving public finances worse off.
From revenue generator to fiscal drain
Under the revised tax framework, coal exports are subject to VAT, which exporters are then entitled to reclaim. According to Mr Purbaya, this has resulted in massive restitution payments to mining companies, effectively cancelling out tax receipts from the sector.
“The state’s revenue is not just stagnant,” he said during a parliamentary hearing. “After refunds are paid, it actually becomes negative.”
The discovery has prompted the government to introduce export duties on coal as a corrective measure, aimed at preventing further erosion of the national budget.
Government defends new export levy
Mr Purbaya insisted the additional levy would not undermine Indonesia’s competitiveness in global coal markets, noting that the industry had remained profitable before 2020, when large-scale VAT refunds were not available.
“Coal exports were competitive long before these restitutions existed,” he said, arguing that the new policy simply restores balance to the fiscal system.
A law designed to attract investment
The Job Creation Law, passed in October 2020 under President Joko Widodo, was promoted as a sweeping reform to simplify business licensing, attract foreign investment, and create jobs.
Speaking at international forums, including the World Economic Forum in November 2020, Jokowi described the omnibus legislation as a source of legal certainty and incentives for strategic industries, from digital services to green energy.
However, the law sparked nationwide protests upon its passage, with critics warning of weak labour protections, environmental risks, and regulatory loopholes.
Unintended consequences resurface
The finance minister’s admission has reopened debate over the law’s broader economic impact. What was intended as a pro-investment tax reform has instead produced an unforeseen fiscal imbalance — particularly in a sector already criticised for its environmental footprint.
With coal refunds now costing the state tens of trillions of rupiah each year, policymakers face growing pressure to revisit provisions of the law and reassess its long-term implications.
For a government seeking to stabilise public finances while funding social programmes and energy transition goals, the coal tax paradox has become an uncomfortable reminder that regulatory shortcuts can carry a high price.
Explainer: Why Is Indonesia Paying Coal Companies Rp25 Trillion a Year?
What happened?
Indonesia’s Job Creation Law changed coal’s tax status, making it subject to value-added tax (VAT).
Why does that matter?
Coal exporters can reclaim VAT they have paid. This means the government must refund large sums to mining companies.
How much does it cost?
According to the finance minister, tax refunds linked to coal now cost the state up to Rp25 trillion (£1.3bn) every year.
Was this the intention?
No. The reform was meant to boost investment and increase revenue, but it had an unexpected fiscal impact.
What is the government doing now?
To offset the losses, authorities have introduced an export duty on coal.
Will exports suffer?
The government says no, arguing the coal industry was competitive even before large tax refunds existed.
Why is this controversial?
Critics say the policy benefits coal companies while draining public funds — and raises questions about how well the Job Creation Law was designed and reviewed.
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