Taxation, in general, makes up the largest portion of government revenue. Some taxes fund specific government programmes, while others fund the government in general. It is commonly believe that taxes are justified as they fund activities that are necessary and benefit the majority of the population.
In Indonesia, taxes constitute more than half of the state revenue, as depicted in the following graph.
Graph 1
Portion of tax revenue as compared to total state revenue
As a developing nation, every year Indonesia is in need of increasing the sum of revenue to fund infrastructure projects, welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation.
Despite the fact that taxation is claimed as the single largest contributor to the state coffers, tax collection in Indonesia has yet to reach the optimal level. In fact, in the past decade (except for 2008 as a result of implementation of the Sunset Policy) the Indonesian Tax Authority has yet to achieve its tax revenue target. In 2017, the realisation of tax revenue of Rp1,151 trillion is only 89.68% of the target state budget (APBN) of Rp1,283 trillion.
In order to resolve this situation, perhaps one of the best indicators to look at is the tax ratio; the ratio of tax revenue compared to gross domestic product (GDP).
The 2016 records show Indonesia has a tax ratio of 8.85%, which is lower that Australia (22.3%), Argentina (12.3%), Canada (11.7%), Singapore (14.2%), Thailand (15.6%) and the United Sates (10.8%). In addition, when the trend of tax revenue is analysed using the buoyancy ratio – the ratio between the growth of tax collection and GDP – it further shows a disappointing trend over the time span of the last decade.
Graph 2
Indonesia Tax ratio as compared to other countries
Sources : Indonesia Directorate General of Taxes
Graph 3
Tax Buoyancy Indonesia 2006-2017
Despite the above, it does not do justice to say that the Indonesian tax authority is lacking in its effort to resolve the situation. In fact in the span of the last five years, the Indonesian tax authority has been relentlessly rolling out many essential bold policies. The following are some of the important milestones that indicate the development in Indonesia tax policies.
Tax amnesty Indonesia 2016
On June 28, 2016, the Indonesian parliament approved, after a lengthy period of discussion, the long-awaited and controversial Tax Amnesty Law. The law aims to increase tax revenues, make fairer tax reforms possible due to an expanded tax base and accelerate economic growth.
Aside from its controversy, this programme is intended to accelerate economic growth and restructuring through asset repatriation, boost fairer tax reforms with an expanded tax base and increase tax revenue that is very much needed, especially to fund development in the country.
In essence, tax amnesty is a waiver of tax due, administration sanctions, and tax crime sanctions which can be granted by paying “Redemption Money” as stipulated in this law.
The following incentives are applicable for taxpayers:
- Waivers of tax due, tax administrative sanctions and tax crime sanctions for all tax obligations for fiscal periods up to the end of the latest fiscal year, for which no assessment letters have been issued.
- Waivers of administrative sanctions in the form of interest and fines for fiscal periods up to the end of the latest fiscal year.
- Exemption from tax audit, preliminary evidence tax audit and tax crime investigation for all tax obligations for fiscal periods up to the end of the latest fiscal year.
- Discontinuation of any ongoing tax audit, preliminary evidence tax audit, and tax crime investigation for all tax obligations for fiscal periods up to the end of the latest fiscal year.
The outcome of 2016 tax amnesty was as follows:
A total of 965,983 people joined the programme that ran between July 2016 and March 31, 2017. However, considering only about 35 million Indonesians - out of an adult population that numbers more than 165 million – are registered taxpayers, there is a huge pool of people who fail to fulfil their tax obligations.
Money-wise a total of Rp4,865.7 trillion (approx. $366 billion) worth of assets have been declared to Indonesia's Tax Office under the programme, surpassing the government's target (set at Rp4,000.0 trillion). The figure equals nearly 40% of Indonesia's gross domestic product (GDP). About 75% of these funds involve assets that were stashed domestically, the remainder are assets that were secretly stored abroad (mostly in Singapore). This result was positive, although one could claim that the government set its target too low.
In terms of redemption payments the Indonesian government collected Rp114 trillion, below its target of Rp165 trillion, but it will somewhat help to plug a yawning gap in the government's projected tax revenue.
E-filing
Starting April 1, 2018, filing of personal and employee income tax returns and value-added tax returns must be conducted over the internet using tax preparation software that has been pre-approved by the Indonesian tax authority. The traditional way is the offline way, where one goes to the registered tax office to physically file one’s returns.
The advantage of e-filing is two-fold. On the part of the taxpayer it is now much more convenient and timely to file tax returns without going through the hassle of travelling (traffic is a big problem in Indonesian cities) and the waiting time. For the tax office, it can significantly reduce the possibility of tax fraud through the forgery of tax invoices, tax payment slips and other tax documents, which at times are almost impossible to examine and verify due to the high quantity of documents and the complexity of transactions.
Automatic Exchange of Information (AEOI)
Indonesia has signed the Multilateral Competent Authority Agreement (MCAA), a legal commitment for the Indonesian government to exchange financial information among (currently) 87 jurisdictions for tax purposes, according to the AEOI standard. Financial institutions (FIs) in Indonesia started the identification of their customers in 2017, and Indonesia is expected to conduct the first reporting in 2018.
Looking at the latest news and the strong message coming from President Jokowi, his administration will take advantage of an opportunity to scrap long-standing bank secrecy policies after adopting new global standards on the Automatic Exchange of Information. It is an inevitable process that all FIs in Indonesia have to perform with taxpayers coming from countries in the agreement, and to report them to those respective tax authorities.
AEOI reduces the possibility for tax evasion, as it provides for the exchange of non-resident financial account information with the tax authorities in the account holders' country of residence.
Big data
Every citizen and corporate entity is responsible for paying and reporting tax information. That means a huge amount of data is available for collection, organisation, management and analysis. In other words, the very definition of big data. Of course, tax records and tax analysis are nothing new; such functions have been around about as long as tax collection. The power and sophistication of modern computers means every individual, organisation or governmental department can become more efficient and deliberate in how they examine and process tax data, integrating computers and data science more than ever before.
Using data sourced from tax office internal databases, third party data, AEOI and social media, through data platforms and integrated data warehouses, the tax authority is able to provide a system of predictive analytics to effectively identify non-compliance, evasion, fraud and other risk management.
The Indonesian tax authority kicked-off this project in 2015 with 10 TB of storage capacity. Currently, it is operating several storage media with a total capacity of 500 TB. The tax authority is therefore able to identify complex taxpayer distribution grids, shareholding linkages and comparable data analysis for corporate income tax, as well as value added tax purposes.
Human Resources
In order to successfully implement the tax programmes that have been enacted by the tax authority, it is imperative that general taxpayers, intermediaries such as the tax consultants and lawyers, and also the tax officers themselves, must well understand and be up to date about the details of the laws and regulations. In this respect, the Indonesian Tax Consultant Association (IKPI), with its 53 years of history and 3,836 strong of members – all certified directly by the Directorate General of Taxation – ought to play an important role in bridging the gap between the tax office and taxpayers. In this respect, the tax office must conduct regular seminars, conferences and talks, presenting its most capable and knowledgeable speakers to highlight various issues confronting taxpayers. Tax policies must be made to be clear, straightforward and comprehensive, as this would avoid ambiguity, a grey area that may lead to confusion and inconsistency among the tax auditors as well as taxpayers.
Conclusion
As elaborated above, Indonesia still has a less-than-optimal tax ratio. As such, tax collection in recent years has yet to reach the target set by the tax authority. That being said, the tax authority has shown its determination to resolve the issue by boldly rolling out aggressive tax policies in order to maximise tax revenue.
In this taxation climate, it is believed that the tax community in general also wishes to comply with their tax obligations and hence to participate fully in the share of nation building.
However, due to the nature of the self-assessment taxation system, whereby taxpayers need to have adequate knowledge about Indonesian taxation and its dynamic regulation updates, the future success of taxation still requires the full cooperation between the tax authority, taxpayers and the tax consultants.
