| ASSESSING INDONESIA'S TAX OPTIMIZATION STEPS - POLICY BRIEF
"Assessing Indonesia's Tax Optimization Steps1",written by E. Panca Pramudya2, analyzes various problems that are caused by inefficient taxation in Indonesia where attempts are being made to overcome through tax reform, in an effort to increase tax income. In this policy brief, we summarize the main objectives of the paper and identify the main policy issues as well as recommendations by the author.
As stated in the paper, taxes comprise the main source of a country's income, which is why efficient taxation must not be overlooked by governments. Based on this income, the government can regulate economic conditions and growth, rates of unemployment and inflation, leading not only toward economic ends (such as increasing per capita income, economic growth, reducing unemployment and stabilizing the economy) but also, social improvement ends, such as equity, education and health. The main purpose of the author here is to identify possible issues in taxation in Indonesia and recommend solutions for a more efficient approach to taxation.
Main Policy Issues and Challenges
An analysis of the historical data shows that Indonesia has low tax revenues. The author points out that the State's failure to collect revenues is the real culprit responsible for the low level of government revenues. In addition to this, there are also several issues that were identified as the causes for such problem - weaknesses in the law and governance framework, deficiencies in organizational structuring and the administrative apparatus, the ineffectiveness of tax-payment and case-handling services, and an outdated information system. These deficiencies in turn result in a high level of tax evasion by taxpayers, and give rise to high costs in doing business in Indonesia.
As part of tax reform efforts, there have been fairly consistent increases in the tax ratio. However, increasing the tax ratio in years to come poses a number of challenges as well. These include the need to optimize the collection of individual taxes, and the lack of government aggressiveness to pursue the tax evasion perpetrated transnationally, to mention a few. Another troubling issue is the ineptitude in the determination of the focus of tax reform in Indonesia. What seems to be the case is that tax reforms are aimed more at image creation than at developing substantive changes in tax management. There is an erroneous focus on administration and as an effect, opportunities to utilize tax reform to restructure the economic posture seem to go unrealized. The lack of preparedness to seize the opportunity to restructure the economic posture, it should first be noted, is not due to a lack of human resource capacity. A more driving factor is the limitation of vision to open more room to build an economic posture for a nation that is sometimes burdened by adherence to the prevalent international-level policy style and a lack of self-confidence to embark on schemes and policies that may be called uncharacteristic or unusual but are necessary.
Aside from those identified above, there are several other issues which are sometimes deemed insignificant but actually aggravate the taxation problem in the long run. One such issue is that tax coverage ratio figures are not yet deemed optimal because tax collection practices are still inadequate. In addition, the government is mainly passive, placing too much hope in the fulfillment of voluntary compliance. The author also points out the absence of adequate sanctions for violators which serve as a deterrent to even more violations in the future.
Attempts are being made to overcome taxation problems through tax reform, in an effort to increase tax income and improve the investment climate in a sustainable manner. Despite past and ongoing tax reforms, there is still much to improve in Indonesia's system of taxation, for which the author has some recommendations. Generally, the author sees a need for a more integrated framework aimed at optimizing state revenues through taxation, so that it can better achieve effectiveness. Corrections of a more administrative and procedural nature should be allowed to continue, but what must not be forgotten is the need to adjust the tax policy framework to meet the need to fix the country's economy.
According to the author, all hopes of taxation reform will go stagnant conceptually (although they seem smooth at a glance) given the reality that the concept and implementation of tax reform itself are more preoccupied with administrative adjustments dominated by normative steps. To balance the excess focus on administration, tax reforms should be accompanied by a tightening of law enforcement as well as significant improvement of public services and education for taxpayers.
Schemes and policies that may be perceived as out of the ordinary may include, for example, developing capital market taxation to develop the capital market itself, so it does not become a target of international speculation. Lastly, determination of tax policy can be directed to develop the traditional and informal sectors to gain a better competitive advantage. One such step is to improve tax incentives for creative industries, without forgetting the need for adequate facilitation, supervision and monitoring.
1 Working Paper for the Perkumpulan Prakarsa Project entitled: "Towards Tax Justice: Raising Awareness, Building Capacity, Supporting International Coordination and Policy Dialogue to Make National and International Tax Systems More Supportive of Development". The first draft of this paper received input in a peer-review meeting on 20 November 2009 at the Perkumpulan Prakarsa office with the following reviewers: Sugeng Bahagijo, Ah Maftuchan, and Sopril Amir (Perkumpulan Prakarsa), Yuna Farhan (Sekjen Sekretariat Nasional Forum Informasi untuk Transparansi Anggaran/Seknas FITRA - Secretary General of the National Secretariat of the Information Forum for Budget Transparency), Mickael B. Hoelman (Program Coordinator, TIFA Foundation) and Novita (Expert Staff of the Democratic Party of Struggle of the Indonesian National Parliament).
2 Researcher, Institut Riset Sosial dan Ekonomi (INRISE - the Institute of Social and Economic Research)