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JP/Editorial: Incentives for taxpayers
A bigger incentive is that children of a father or mother with a taxpayer number will also be exempted from the exit tax if they are under 21 years old.
This incentive, included in the new income tax law to be enacted later this year, is one of the measures approved by the government and the House of Representatives to encourage more people to register as income taxpayers.
The government seems to have learned lessons from previous tax awareness campaigns that listing new taxpayers without incentives is not an effective way of getting people to regularly file income tax returns.
The directorate general of taxes, instead of waiting for people to voluntarily register as taxpayers, conducted a massive, property-based taxpayer registration drive in 2005 by sending taxpayer registration numbers to people in middle and high-income housing complexes in Jakarta and surrounding suburbs.
This registration drive brought in more than seven million potential new taxpayers. However only a minority eventually filed annual tax returns due to weak collection systems and the absence of an incentive-disincentive mechanism.
Data from the taxation directorate general shows that as of last month, there were six million individuals and entities with taxpayer registration numbers. Yet only 2.4 million regularly filed annual tax returns, of which 1.3 million were personal taxpayers (or 0.5 percent of the whole population) while 1.1 million represented institutional taxpayers (legal entities).
The income tax bill currently under discussion at the House of Representatives will establish incentives for individuals and institutions to get taxpayer registration numbers, with disincentives for non-registration.
The House and the government have also agreed a provision which would make the income tax burden imposed on trading firms without taxpayer numbers twice as high as the standard rate set for companies with registration numbers.
Individuals without taxpayer numbers will also find it increasingly difficult to do transactions. The income tax bill, which is expected to be approved within the next few weeks, will make it impossible for people without taxpayer numbers to buy diamonds or jewellery, or cars worth more than Rp 1 billion and apartments valued at over Rp 2 billion.
These incentives and disincentives are designed to encourage individuals of 21 years old or older to get taxpayer registration numbers and to file annual income tax returns.
However, taxpayer data will not help broaden the taxpayer base if law enforcement remains lax and the administrative capacity of the tax authorities is not improved.
Certainly, newly registered taxpayers still have to be encouraged to voluntarily comply with their tax obligations by filing tax returns. Taxpayers should be educated to understand that filing tax returns is not complex or costly.
However, voluntary tax compliance will increase if the cost of tax evasion and of the non-filing of tax returns is higher. People are also more likely to fulfill their tax obligations if they know there is a bigger chance of being caught by tax officials and auditors for tax evasion. This environment requires a stronger law-enforcement system and a higher tax administration capacity to handle taxpayers.
The stronger incentives and disincentives will help significantly increase the number of registered income taxpayers next year but this will pose a challenge to the tax directorate general to expand and improve its administrative capacity.
Yet more challenging is that tax officials will have to work harder to improve their image because the tax office has long been perceived to be one of the most corrupt public institutions in the country. The government would also be well advised to understand that voluntary tax compliance is influenced by the public perception of how tax receipts are used by the government (good governance).