More than 1700 travellers have been affected with around a dozen flights cancelled since Wednesday.
"Tigerair Australia sincerely apologises for the inconvenience caused by this decision and we are working to resume flights as soon as possible," the airline said in a statement.
Bali is one of the most popular destination for Australians. More than one million visit Indonesia each year.
At least 350 passengers are stranded in Bali awaiting flights home.
Virgin Australia, which owns Tigerair, was scheduled to operate two flights from Bali to bring as many affected customers as possible, according to a statement from Tigerair.
The issue arose after Indonesian government asked the budget airline to comply with new licensing conditions on Tuesday.
Rob Sharp, Tigerair's chief executive officer, said the airline had temporary approval under charter flight arrangement from Indonesia to operate between Australian cities and Bali until March 25, 2017, which has been ongoing for the past eight months.
"This involves selling tickets in Australia between Australia and Bali. Under the existing agreement, we are not able to sell tickets in Indonesia and we are fully compliant with this," he said.
The director-general of Air Transport in Indonesia had accused the airline of breaching its agreement and selling tickets in Indonesia.
Some of the travelers took to social media to blast the airline.
On her Facebook page, Melbourne resident Megan Deal said other airlines were either fully booked or charging ridiculous amounts.
"Our long-awaited family holiday has been ruined and I have to tell my devastated kids in the morning we are no longer going to Bali today!!" she said.
"Needless to say we will NEVER fly with your company again and will inform others not to do so either!!"
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