The Effect of Tax Incentives on MSME Tax Compliance in Indonesia

Abstract

Micro, Small, and Medium Enterprises (MSMEs) play a strategic role in the Indonesian economy; however, the level of tax compliance among MSME taxpayers remains relatively low. The Indonesian government has implemented various tax incentive policies, particularly the final income tax scheme for MSMEs, as an effort to encourage tax compliance and broaden the national tax base. This study aims to analyze the effect of tax incentives on MSME tax compliance in Indonesia.This study employs a quantitative approach using a survey method involving MSME taxpayers registered in Indonesia. Data were collected through questionnaires and analyzed using multiple linear regression analysis or Structural Equation Modeling–Partial Least Squares (SEM-PLS). The independent variable in this study is tax incentives, while the dependent variable is MSME tax compliance.The results indicate that tax incentives have a positive and significant effect on MSME tax compliance. The provision of tax incentives encourages MSME taxpayers to fulfill their tax obligations more consistently, both in terms of formal and material compliance. These findings suggest that well-targeted and sustainable tax incentive policies can effectively improve MSME tax compliance.This study contributes theoretically to the literature on MSME taxation and provides practical implications for policymakers in evaluating tax incentive policies to enhance tax compliance and optimize government revenue from the MSME sector.