Corruption a barrier to achieving tax revenue target

Corruption a barrier to achieving tax revenue target

The government, under its budget plan recently proposed to the
legislature aims to increase its total tax and excise revenue by
18.7 percent to Rp 260.78 trillion (nearly US$30 billion) next
year from Rp 219.62 trillion expected this year. Muhammad Chatib
Basri, associate director of the University of Indonesia's
Institute for Economic and Social Research (LPEM), talked to The
Jakarta Post contributor Rikza Abdullah.

Question: Is the government's target of increasing its revenue
from taxes and excise by 18.7 percent next year realistic?

Answer: The targeted revenue of Rp 260.78 trillion for 2003 is
still too low because it will amount to only 13.3 percent of the
country's gross domestic product (GDP) (projected to reach Rp
1,955.47 trillion that year). This will indicate a slight
increase from this year's target of Rp 219.62 trillion, which
will be 13 percent of the GDP (projected at Rp 1,685.38
trillion). In other countries tax collection can exceed 15
percent of their GDPs.

But the 2003 target would be very difficult to achieve if the
government doesn't intensify tax collection and improve its tax
administration. The current poor tax collection has made it easy
for companies and people to avoid tax payment, while the poor tax
administration has made it possible for tax officials and
taxpayers to collaborate in corruption.

Q: Which is the larger amount, the amount of money siphoned off
by tax officials or the amount that should have been paid by tax
evaders?

A: Maybe it's the amount of money siphoned off by tax officials.
But that will surely depend on each case. A taxpayer, who does
not want to pay an income tax of Rp 600 million, would prefer to
pay Rp 150 million (as a bribe) to tax officials so he could pay
only Rp 50 million for the tax.

Q: So how can the government expect a 5 percent growth by 2003?

A: That expectation does not make sense to me. But my
consideration is not related to the planned increase in tax
collection and reduction of subsidies because the impact of
energy (fuel and electricity) price increases is not substantial
and the planned increase in tax collection is not significant.

Because the country's GDP grew by 3.3 percent in 2001, when
the world economy was slowing down, it is reasonable if we expect
the GDP to grow by 3.8 percent this year due to improvement in
the world economy.

But it would be unrealistic if we project the GDP to expand
drastically to reach 5 percent in 2003 with no improvement in
investment. Domestic investment will not increase significantly
that year because banks are still reluctant to channel credits to
companies, while foreign investors are scared to enter Indonesia
due to social and labor unrest as well as business uncertainty.

Q: How far will the GDP grow?

A: Based on the optimistic scenario by the LPEM, the GDP is
likely to grow by 4.4 percent in 2003.

Q: Is it realistic for the government to increase its revenue
from income taxes on non-oil sectors by 27 percent for 2002?

A: It would be too hard. Its success will depend mostly on
whether the government can identify and force tax evaders to pay
their income taxes and all tax officials to pass on all income
tax payments to the state treasury. Corruption related to the
collection of income taxes is relatively easier and larger in the
amount of money involved than that related to value added tax.

Many business people, therefore, complain on corruption
related to income tax. Some executives of the 1,700 companies
surveyed by the LPEM recently said they would rather allow the
government to impose an extra tax of some 7 percent to 8 percent
on their incomes than to pay bribes, which can reach 10 percent
of their incomes, to corrupt tax officials.

Q: How can the government expect its revenue from value added tax
(VAT) to increase by 17.1 percent to Rp 82 trillion in 2003?

A: This target is easy to achieve because domestic consumption is
likely to continue growing at an annual rate of 6 percent and,
therefore, will remain strong. The planned reduction of subsidies
will not boost inflation because the country's inflation is
influenced more by the fluctuations of the rupiah's value than
the movements of fuel prices.

Recent experience indicates that the inflation rate was on a
downward trend in the months following fuel price increases in
January, because the rupiah's value appreciated against the U.S.
dollar.

Q: Will the smuggling of manufactured goods into the country
affect the VAT revenue target?

A: The smuggling of manufactured goods will affect domestic
producers, who have to pay taxes, in competing against such
untaxed imported products. But it is unlikely to cause VAT
collection to fall short of the target.

The targeted revenue of Rp 82 trillion, which would be equal
to about 4.2 percent of the country's GDP, is still too low. The
government's VAT revenue should actually be able to reach 8
percent of the country's GDP (projected at Rp 1,955.47 trillion).

Q: Will the government face difficulties in raising its revenue
from excise on cigarettes to Rp 27.64 trillion in 2003?

A: Yes, it will. Even though smokers have a difficult time
quitting, their cigarette consumption will decrease when
cigarette prices increase. The sales of cigarettes during the
first seven months of this year declined due to an increase in
price.

Q: How about the government's expectation to increase revenue
from import duties to Rp 13.82 trillion from Rp 12.25 trillion,
while the country will enter a free trade era in 2003 under the
ASEAN Free Trade Agreement (AFTA)?

A: The government will be able to achieve its expectation because
it's expanding the number of commodities subject to import
duties, including agricultural produce. However, such a trend
contradicts the principles of AFTA and the World Trade
Organization (WTO).

Perhaps, the expansion on imposition of duties would not
violate the AFTA and WTO principles if the rates are still within
the allowable range or the affected commodities are excluded from
agreements; but the government's inconsistency in trade
liberalization should become our concern because it is a setback
and may affect domestic economic activities.

Q: Will the government's plan to raise revenue from property
taxes increase burdens on taxpayers?

A: It won't if the government pursues its target merely by
intensifying tax collection. Many have evaded the payment of
taxes on land and buildings. The target will burden taxpayers if
the government raises the tax rates.