Fri, 14 Oct 1994

DPR approves tax bills

Yesterday the House of Representatives (DPR) finally approved four bills on taxation previously proposed by the government to amend the 10-year-old tax laws. This approval, constitutionally required before a bill can be signed into law by the president, marks a new stage in this country's efforts at modernizing its economy.

Ten years ago this country set up a historic milestone by introducing a totally new tax system, the first of its own during its almost 40 years' existence as an independent republic. Before that time, what the country had was an assortment of obsolete tax regulations inherited from the colonial period.

National governments need money to finance their activities of governing and serving their people. Some governments have substantial revenues from state-owned assets or facilities, which permit them to dispense with taxation altogether, or to rely on taxation only to a limited extent. But most governments in these modern days typically find themselves on the other side of the ledger, having on balance negative net worths apart from their taxing power.

In a way, before 1984, Indonesia financed its government and development mostly by the revenues it received from its oil and gas assets, as well as from foreign loans and grants. The decline of world oil prices made that policy unsustainable. In addition to that, the amount of funds needed to service its foreign debts had been increasing steadily from year to year, to the extent that within a few years, the amount of money flowing out of this country to service its external public debts could have been higher than the amount of new loans and grants it could expect to flow in.

Tax laws numbers 6, 7 and 8 of 1983 and No. 12 of 1985 were designed and introduced to eliminate Indonesia's overdependence on oil revenues and foreign loans. With that series of tax laws, a fundamental change took place in how to and who should finance this country's government and development. With the approval of the DPR at that time, it was decided that taxation would be relied on to become the main provider of state revenues.

It was a tough decision. And it works.

Within the last 10 years, the government's budgets have increasingly relied on revenues from income tax and value added tax. In fiscal year 1983-1984, income tax, corporate tax, MPO tax, PBDR tax and sales tax contributed about 20.29 percent of internal revenues, or only 16.93 percent of the total revenues (including foreign aid) needed to finance the government's expenditures, both routine and development. During the fiscal year 1993-1994, after the five former taxes had been simplified into only two kinds of taxation, income tax and value added tax increased their contribution to more than half of internal revenues, or about 40.61 percent of total revenues.

Simultaneously, that change made the country's economy much less vulnerable to the fluctuations of world oil prices.

And besides being a revenue provider, the taxation system is to function as an income redistribution tool. For that reason it is systematically progressive in the sense of taking into account an increasing proportion of income increases. At least this is the theory behind the policy. Empirically only modest success can be claimed in reducing the incomes of the very wealthy by tax measures -- this being so even in countries like the United States and Great Britain.

In the case of Indonesia, the fact that the taxpayer base has significantly increased, is already an achievement in itself. When the new taxation system started 10 years ago, less than 700,000 taxpayers -- persons and legal bodies -- were recorded. Nowadays, the base has increased more than fourfold, to more than 3.1 million taxpayers.

However, another important function of taxation, that is resource reallocation, has not been applied so far to the Indonesian taxation system. In fact when the government introduced the system in 1984, it was categorically emphasized that the taxation system would not be used for resource reallocation, which would basically provide the government with a tool to alter the product-mix generated within the private sector. Government officials at that time pointed out again and again that the system of taxation would not be used as an incentive or disincentive to the economy.

The limitation of the functions of the taxation system to those of revenue provider and income redistribution has made Indonesia less and less competitive in its efforts to invite much needed foreign investments.

The newly approved amendments to the tax system break this limitation. With these amendments, once they are signed into binding laws, the country will have more options to choose from in engineering its economy towards its development goals. This is obviously the most substantial change.