Fiscal distress and tax reform
This is in reference to the highly thoughtful editorial in your paper on Nov. 20, 1999, under the title The fiscal distress.
I am glad that your analysis is consistent with suggestions in our two articles published in The Jakarta Post dated Oct. 27, 1999, on Raising revenue without tax hikes and Nov. 19, 1999, on Urgent fiscal policy tasks before RI. We agree with your assertion that even if debt rescheduling and the privatization of state enterprises is achieved, fiscal distress will persist for one or two years if revenue from domestic taxes is not significantly increased. You are quite right to suggest that "as long as the tax system is riddled with many tax loopholes, and the tax base remains narrow, the government will continue to face a liquidity crisis and will increasingly depend on foreign borrowings to make ends meet ...."
However, we wish to assert that what Indonesia needs is not piecemeal changes in its tax laws and procedures, but rather a comprehensive review of the entire tax structure to introduce changes with the twin objectives of revenue enhancement and equity. In such a comprehensive review, we should not be blind to the realities of Indonesian social and cultural practices and inadequacies in government organization, including the lack of coordination between ministries and several layers of administrative control.
Let us illustrate some of these points: In 1985/1986, when the new and existing income tax and value added tax laws were formulated for revenue enhancement, there was the stipulation of voluntary compliance on the part of tax payers. The Indonesian tax payers, like their counterparts in other developing countries, were not used to filing tax returns. The result was that few people filed tax returns, as is still the case.
In order to collect some assured amount of revenue, the government resorted to the administratively convenient practice of "final withholdings" at lower tax rates from many important sources of income. This is the main cause behind the massive erosion of the tax base. For the value added tax (VAT), it was assumed that businesses, particularly in the retail sector, maintained accurate and detailed accounts for paying the VAT. In developing economies the accounts of small and medium-size enterprises are not kept as regularly and accurately as required for the VAT. Hence, the government had to introduce the easy option of paying a 2 percent VAT (instead of the originally stipulated 10 percent) if the enterprise would forego claiming tax credit. This suited the business lobby, and created a big loophole and serious inefficiencies.
Furthermore, the 1985 tax reforms stipulated a thorough audit of voluntarily filed tax returns, ignoring the fact that the tax department, particularly at regional levels, did not have any computerized tax database to identify massive amounts of concealed income or the manpower to perform the audits. How strange is it that after the tax reform of 1985 and continuing today, tax auditors do not have the legal authority to verify bank deposits and many other sources of income of tax offenders. Confidentiality laws, which shield tax offenders from declaring their income, continue to exist.
Now that the need to introduce badly needed reforms in tax laws and procedures is well recognized, studies on changes in tax laws and procedures are being undertaken in several governmental and non-governmental agencies. However, there is no coordination between them.
What is needed is a comprehensive review of the total tax system, including the tax structure at the decentralized local level. Teams for such a comprehensive review should be composed of competent Indonesians who know the Indonesian way of thinking. They should be assisted by foreign experts, who themselves should be knowledgeable on developing Asian economies, which in many ways operate differently from the economies of Western countries.
J.S. UPPAL
Yogyakarta