Caveats within Susilo's tax amnesty plan

Caveats within Susilo's tax amnesty plan

David E. Sumual, Jakarta

In an apparent effort to reform the overall tax system that
discourages investment, the Susilo Bambang Yudhoyono
administration has revealed its plan to draft a tax amnesty law
as one of its first 100 days' actions. Nonetheless, the finance
ministry did not elaborate further whether this intended tax
amnesty also involved a reprieve for the criminal aspect of tax
evasion.

The criminal aspect of tax amnesty is of importance, as it
would involve the moral hazards problem and the people's sense of
fairness. The moral hazards problem arises when people expect to
be offered another amnesty, and would lower their compliance to
pay tax in anticipation of the future tax exemption. Those honest
taxpayers would also react negatively to the fact that evaders
were being given concessions and they may choose not to comply in
the future.

At a time when the government is considering reducing fuel
subsidies next year, people may also react negatively like when
the government announced the release and discharge policy at the
same time when it announced fuel price hikes last year.

The general public may perceive this preferential treatment
as unfair as those tax evaders are no longer subject to criminal
punishment while, at the same time, the additional burden of
higher fuel prices is imminent.

Given these tricky situations, it is important for the
government thus to distinguish the taxpayers' character. As
such, the government must give the right message, that amnesty
does not tolerate those tax evaders who try to manipulate their
tax reports. In other words, the tax amnesty program only gives a
chance for the people who may have made an honest mistake on
their taxes to clear their profile, without fear of prosecution.

And, at the same time, the program should not let lawbreakers
off scot-free or not be open to those already under prosecution
for tax manipulation. This is particularly true, as some studies
have showed that the primary reasons for Indonesian businessmen
to evade taxes are actually the choking bureaucracies and the
unscrupulous tax officials seeking to extort money from them for
personal gain.

To avoid moral hazards, tax amnesty has to be a one-off
occurrence to give just a one-time opportunity to make up for
past mistakes. In fact, it should be made clear that this is
their only chance, since there would be no guarantee that this
policy would ever be offered again in the future. The amnesty
period that waived all penalties and the accrued interest on the
owed taxes should be thus predetermined for the specific taxable
periods.

Nonetheless, after the amnesty ends, an eligible taxpayer who
fails to apply should face additional penalties, as well as
criminal charges. Moreover, the law enforcement must be then
intensified and be tougher than ever to give an important signal
to the non-compliers that they will be punished severely when
they are caught.

Besides moral hazards, a tax amnesty of course incurs real
costs in the short term, in the form of penalties or interest
that should have to be forgone to make voluntary disclosures
attractive to past evaders.

However, there is a tradeoff coming forward as some
additional tax is likely to be collected if those past evaders
are successfully brought into the tax system and begin paying the
correct tax.

Both the tax revenue and number of taxpayers that are
currently only around 1 percent of Indonesia's population, would
in turn get a boost as exemption gives people in the underground
economy incentives to go legitimate.

Having said that, the massive informal economy in Indonesia
that must hide to survive and thus cannot use legitimate channels
for finance can be reduced. Furthermore, in the longer term, an
amnesty also allows the tax authority to reduce its
administrative procedures, thereby saving in administrative
costs.

Worldwide comparative studies on tax amnesties have actually
shown that the cost/benefit outcomes of amnesties are highly
variable. In developed countries, the government tax amnesty had
played a major part in the improvement of their fiscal
conditions. The impact of tax amnesty measures in Italy for
instance is reportedly around 1.5 percent of its GDP in 2003.

According to the U.S. Federation of Tax Administration, the
U.S. has also offered exemption over the last two decades and was
successful in bringing millions of individuals and businesses
onto the tax rolls for the first time.

In contrast, the Philippine experience, however, showed that
tax amnesties have not worked so well. The main reasons for the
Philippine's failure may relate to its undeveloped tax system,
its tax reform that in nature was still partial and a lack of law
enforcement.

Learning from the Philippines experience, the "time factor" is
very important, as everything that is done in a hurry would be
likely to fail. As such, the government must ensure that the
overall tax administration is ready before the implementation of
tax exemption measures.

Improving transparency and efficiency of the tax office by
cutting bureaucracy is thus a must. The online system that is
equipped by computer tracking and a data mining system should
also be in place, in order to make it easier to hunt down
delinquent taxpayer accounts.

Moreover, improving tax administration should, of course, be
directly linked to the tax officials' salaries. By raising the
salaries of tax officials, there is less justification for them
to be corrupt.

However, this improved tax system will not work without a
better judicial system. By having well functioning law
enforcement agencies, shock therapy to arrest corrupt tax
officials or well-known figures that manipulate tax will not face
public suspicion of being merely theatrical.
With the improved tax administration, an amnesty could therefore
be an effective transition tool before increasing enforcement
activity or making significant tax reform.

The writer is an analyst of Danareksa Research Institute
This article is a personal view and it is intended only to
enhance public debate.