Fiscal distress and tax reform
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