Behind tax-shortfall: rethinking Indonesian taxation

Arif Gunawan Sulistiyono & Anton Hermansyah

“2015 is a tough year for all of us, a year that full of challenge especially in the finance sector," said President Joko “Jokowi” Widodo in his remark during the initial opening bell of 2016, on Jan. 4 at Indonesia Stock Exchange (IDX).

Unfortunately, he saw the Jakarta Composite Index (JCI) dropped at that morning, as if ignoring optimisms that he had shared. The market seemed worrying the dull Chinese stocks market more than the bright Indonesian outlook that Jokowi promising at that moment.

Looking at the domestic news the President had brought, one should find a fair achievement, with 4.7 percent of economic growth or an inch-below the government’s target of 5 percent, and grabbed Rp 1,491.7 trillion of state revenue, or 85 percent of the target. They were all achieved during the sluggish world economy, which is not an easy job.

“Many people doubts about state budget realization. But you could ask Coordinating Economic Minister and Finance Minister that I personally control the state revenue every morning, every midnight,” said Jokowi.

Jokowi’s hard work, indeed, has brought the tax revenue to a new-high record, above Rp 1,000 trillion or the first time in Indonesian history. However, the sky-roofing tax revenue in 2015 targeted at Rp 1,294 trillion, a 14 percent increase compare to 2014 target at Rp 1,072 trillion ended with a red mark.

It has led to a tax shortfall at around 18 percent, an Rp234 trillion deficit, as the finance minister only booked Rp 1.060 trillion of tax revenue. The 18 percent shortfall, based on budget reports 2005-2015 that thejakartapost.com compiled, is the worst shortfall in the last decade.

Amid the situation, Jokowi administration has set a high-bar of tax-revenue target in 2016 at Rp 1,368 trillion, or a 5 percent increase (year on year). In turns, the new target invites more skeptical voices on the tax-office’s ability in completing the task.

Huge potential
Tax observer Parwito argued that the 5 percent increase of the 2016 tax-revenue target is actually a conservative number because it represents a natural growth, in a very big pond of “tax fishes”. Especially, Indonesian economy has a 5.5 percent compounded annual growth rate in the last five years.

“I’d say the tax officers do not have to launch extra efforts to reach that target. They can just sit back and wait for the tax payers to come and pay. But the problem is they are too lazy, they don’t want to perform especially amid bad tax administration,” he said to thejakartapost.com on Tuesday.

Looking at the tax revenue that was achieved by only 82 percent of the 2015 target, he underlined that the problem is not in the sluggish economy—which Coordinating Economic Minister Darmin Nasution and Finance Minister Bambang Brodjonegoro used as the scapegoat.

Parwito rejected it. He believed that the problem is more technical, in the tax office itself such as limited numbers of tax officers, poor tax administration, obsolete technology, the “lazy” officers—despite the increased remuneration, and lack of authority to access bank’s data.

Assuming that Indonesia was in crisis in 2015 with minus growth in the economy, he argued, the tax office can still attempt to collect payable-taxes back to five years before (2010) during its collection statute expiration date (CSED). Before the 2007 Tax Law revision, the expiration date was even longer, up to 10 years.

As a former-tax office director (taking office in April 2006-July 2009), Darmin should know it better. This is how the tax office works, by collecting the current tax liabilities as well as the back taxes (payable tax liabilities). Thus, the tax collection performance is not necessarily in line with the economic situation.

“Therefore, during President Gus Dur era in 1999 when the economic growth was near zero [0.62 percent], the tax office managed to fill the target by almost 99 percent because they collect the corporations’ back taxes, up to 10 years period before it,” Parwito explained.

The technical and human resource problems in tax collection. He believed tax officers can perform much better if “Gayus mentality” is totally purged from the office. All those internal problems in tax office, have led to the low tax ratio and limited tax base.

Based on the tax agency’s latest published data (as of March 2015), there were only 28 million workers in the country who have signed for tax identification number (NPWP), out of around 50 million to 60 million employees who supposed to become individual tax-payers (WP). 

And guess what? Only half of 28 million workers holding NPWP routinely submit their tax forms (SPT) and—at the same time by submitting SPT, pay their income-tax regularly.

Data on institutional tax-payers of the country is even worse. The latest data, published on 2014, showed that out of 1.2 million companies which have had NPWP, only 46 percent of them or around 550.000 companies that submitted their SPT. And the rest? Untraceable.

It is no wonder then, that Indonesia is among the countries whose tax-ratio—the total tax revenue as a percentage of gross domestic product (GDP)—is very low, at 12 percent. It is far below Vietnam (13.8 percent), Singapore (14.2 percent), Philippines (14.4 percent), Malaysia (15.5 percent), and Thailand (17 percent).

Jokowi, during his campaign, pledged to increase Indonesian tax ratio to around 16 percent. But looking at his first year of reign, nothing seemed to have changed. The big ambitious target in 2015 had yet to be followed up with the better tax policies and administration.

Indeed, some measures have been made such as issuing tax amnesty plan, tax incentives for asset revaluation, and other tax incentives to boost the industry which ultimately increase tax income. But the realizations and even the results are yet to be seen as it may take years to impact.

It is normal, then, to see many criticism sparked on the ‘ambitious’ 2016 tax-revenue target, leading recommendation to revise down the target, to a “more realistic level” as University of Indonesia taxation expert Darussalam.

And we expect the Finance Minister, who scheduled to join the tax office’s executive meeting (Rapim) today (Jan. 12) will evaluate the tax office performance, get deeper into the core of the problems, and come out with scalable programs on taxation rule, Tax Law revision, and tax reformation.***