Entertainment tax rates are once again in the public spotlight after Indonesia’s Constitutional Court (MK) rejected a judicial review of the Special Goods and Services Tax (PBJT) applied to entertainment services in early 2025.
In its ruling (No. 32/PUU-XXII/2024), the Court upheld the legality of Article 58 and Article 101 of Law No. 1 of 2022 on the Financial Relationship between the Central and Regional Governments (UU HKPD), confirming that the minimum 40% and maximum 75% tax rates for nightclubs, bars, karaoke lounges, spas, and steam baths are constitutional.
The ruling reaffirmed a policy that has sparked considerable backlash from entertainment industry players, who argue that such steep tax rates threaten business sustainability and risk pushing operations into the informal (shadow) economy.
Criticism of these high taxes has been growing since 2024, when many local governments began enforcing the new PBJT rates. Although the decision to apply specific tax rates lies with regional governments, pressure mounted on the central government to intervene.
President Joko Widodo even held a limited cabinet meeting to discuss the issue, and several ministers made public statements in response to business concerns.
Amid the heated debate, there were talks about providing fiscal incentives—either through a 10% reduction in corporate income tax or via regional discretion to offer entertainment tax relief.
In fact, Article 101 of the HKPD Law does allow regional leaders to provide local tax incentives to boost investment and economic growth.
Yet by mid-2025, the idea of offering these incentives has remained just that—an idea. The main stumbling block: the lack of a Government Regulation (Peraturan Pemerintah/PP) that would serve as the legal basis for how such incentives should be implemented.
The process of drafting this technical regulation has been slow, especially following the 2024 elections, as the government shifted focus toward political transition and consolidation.
That’s unfortunate—because with the right design, tax incentives could serve as a short-term lifeline for formal entertainment businesses, which are also part of the broader tourism industry. Much like social assistance for vulnerable communities, tax breaks are a fiscal tool to ease the economic burden on struggling businesses.
Beyond being a fiscal issue, the entertainment tax controversy underscores the importance of a participatory approach in policymaking. A key weakness in the implementation of the HKPD Law was the lack of early and open dialogue between the government and business owners.
Policies that fail to account for the capacity and resilience of affected sectors are more likely to face resistance—and possibly end up in court, as we’ve seen.
Moving forward, the government needs to adopt a more adaptive, data-informed approach when designing regional fiscal policies. Offering incentives doesn’t mean sacrificing state revenue—it’s about finding balance between fiscal interests and economic sustainability.
After all, when businesses survive and thrive, the tax base only gets stronger.
