Govt could increase revenue 40 times if diligent

Berni K. Moestafa, The Jakarta Post, Jakarta

The public hailed last year's amendment to the 1983 tax laws, but frowned when they saw the slew of tax regulations issued this year to implement the new laws.

The updated tax laws were praised as owning a greater sense of justice while still aiming at improving tax revenue collection.

They also paved the way for the government to overhaul its tax regulations in support of the new laws.

But that is when public support fell and turned to criticism.

The business community and the public at large were stunned by a wave of new tax policies, some of which were said to be simply erratic.

The first wave came in December of last year. They regulate income taxes on interests from bank time deposits, and value added taxes (VAT) on agriculture and animal husbandry products.

Under the new ruling, the government raised the income tax on interest from bank time deposits to 20 percent from 15 percent.

It also slapped a 10 percent VAT on vegetables and meats that were sold at supermarkets.

This drew criticism from bankers as well as producers of vegetables and animal breeders/meat producers.

The Association of Private National Banks (Perbanas) warned that the new tax policy would scare off bank customers, and might trigger increased capital flight.

In response, the government eased its stance and even exempted income tax on interest gained from bank savings and time deposits of up to Rp 7.5 million (about US$748).

No less than the Minister of Agriculture, Bungaran Saragih rejected the VAT for the agriculture industry.

He said the policy threatened farmers who have specialized in supplying supermarkets with their products.

President Abdurrahman Wahid, while in office, decided to scrap the policy.

In January 2001, the government issued 41 decrees, which, among other things, tacked on a luxury sales tax for automobiles by up to 75 percent.

Here, car manufacturers argued that higher taxes would hurt sales, and backfire on the government by generating less tax revenue.

However, this time the government stood firm on its policy.

The same as it had on another ruling, where income earned from trading on the bond market was taxed in two ways: one on interest income and another one on capital gains which already includes interest income.

The country's only bond market, the Surabaya Stock Exchange (SSX) said the policy smacked of double taxation and had prompted bond traders to desert the market.

Apparently not clear about its own policies, the government formed, in February 2001, a team with the SSX to review it. But policy remains in effect today despite the review team and the new government.

All this brings about the impression that the government deliberately issues dozens of tax regulations knowing full well that only a few of those will need to be revoked due to strong protests, and thereby "sneaking in all the others".

The sudden flow of new tax regulations, however, should be seen in light of the recently amended tax laws.

A surge in tax regulations have followed previous amendments of tax laws in 1983 and 1995, according to one tax expert.

And last year's amendments focuses on several targets.

Among them is to improve the tax administration, increase tax compliance, make the tax burden more equitable and to support the decentralization of fiscal authority.

Consequently, this calls for the replacement of outdated tax policies and the imposition of new ones.

On a different front, the 2001 state budget requires the government to significantly increase its tax revenue targets.

That alone would justify the government tightening its tax policies.

But last July, amid fears that the state budget deficit could swell beyond its target, the government again hiked its tax targets.

Now the Finance Ministry must raise Rp 174.25 trillion in domestic taxes, up from Rp 95.53 trillion under last year's budget.

Although the previous state budget ran only for nine months, with another Rp 78.72 trillion in taxes to raise, the new tax policies come in handy.

That the policies however fail to garner public support, unlike the laws that they were intended to support, is another problem.

Firstly, the common thread that ran through almost every protest against the new tax policies, was lack of publicity.

Often businesses and individuals complained that they had not been informed of a new tax policy until it was already out.

Secondly, seeking the easiest way to hike tax revenue can often be the surest way to draw the ire of the business community.

The government seems to have targeted taxpayers where it thinks it can easily collect money, an expedient cop-out which often disregards the circumstances.

Using supermarkets or banks as tax collection points, the government attempts to hit as many people as possible with the least administrative cost.

But targeting consumers pressurizes sales and hurts the very sectors that are still reeling from a four-year long economic disaster.

Another example is VAT. According to the Director General of Taxation Hadi Purnomo, VAT is the easiest way to increase tax revenue within a very short time.

He did not say that VAT applies to all taxpayers irrespective of their income levels, however.

Imposing a VAT on products purchased by consumers of different income levels, would come at the expense of lower income groups.

Ultimately, the ease with which the government is able to hike tax rates only blurs the line between taxation and extortion.

Bearing in mind that public services are some of the most atrocious of any country in the world, there is a potential danger of a major public backlash if it continues taxing with such inconsiderate expediency.

Public awareness on the duty to pay taxes is likely to stay low, while in raising it the government would have gained access to its actual tax revenue potential.

Broadening the tax base, by way of making more people pay taxes as they should, also offers the least public resistance.

According to the government, a shockingly low one million of the country's 220 million people even own a personal tax identification number.

And of these, only half actually file their annual income tax returns.

Tax officials estimated the potential number of eligible tax payers exceeded 20 million people.

Roughly speaking, income tax revenue could be increased by 40 times.

Economists have long urged the government to focus its effort on finding new taxpayers rather than imposing new burdens on the minuscule amount of people who are already paying.

Yet getting people to pay their taxes will likely take up more time and energy than anyone here in the government cares to devote to such a task.

The government needs every bit of revenue to secure its fragile state budget and keep the country's economy afloat.

A quick, easy solution to boost tax revenues by merely increasing the burden on the honest taxpayers could be very tempting, especially with such an immediate need for cash as the nation now faces.

But, like most get-rich-quick-scams they often fail in the long run and hurt the people who they are most trying to help.