Tue, 19 Aug 2003

Govt will not raise tax rates, senior official says

The Jakarta Post, Jakarta

Director General of Taxation Hadi Purnomo said the government would not raise tax rates next year despite the higher tax revenue target set by the 2004 state budget draft.

Hadi said the tax office would focus more on enforcing tax compliance.

"Tax rates will not be increased. We'll focus on increasing tax compliance by 30 percent to around 40 percent," he told reporters on Saturday on the sidelines of Independence Day ceremony at the directorate.

Hadi claimed that the tax office had carried out a number of measures in the past year to improve tax administration which could help increase compliance and collection.

The government last week unveiled the 2004 state budget draft in which tax revenue would be increased by 6.6 percent to Rp 271.02 trillion to finance next year's budget of around Rp 368.80 trillion.

Around 49.1 percent of the tax revenue target would come from income tax, 31.8 percent from value added tax (VAT) and luxury taxes, and the remainder from other taxes.

The tax revenue target represents a higher tax ratio of 13.5 percent of gross domestic product (GDP) compared to this year's tax ratio estimate of 13.1 percent of GDP.

In the past couple of years, the government has been relying more on tax revenues to support the country's fiscal consolidation process (reducing the budget deficit and debt levels) because of the very limited room available for cutting down on spending in other areas.

Analysts have said that the country's tax ratio was still relatively low compared to the ratio in other neighboring countries which ranges between 14-15 percent.

They said that to boost tax collection, the most effective way would be through improving the tax administration side rather than through increasing tax rates.

Enforcement is seen as a serious problem, especially with corporate and personal income tax where many people simply claim no income.

One study showed that the ratio of actual to potential revenues collected in this country varied between 50 percent and 85 percent.

Among the measures already taken by the directorate of taxation to improve tax administration is a plan to introduce a special office called the Large Taxpayers Office (LTO), which hopefully will improve the tax payment system, strengthen the audit system and intensify tax arrears collection.

The LTO, which has been established but is not yet operational, is mandated to collect taxes from big businesses. The tax office plans to open more LTOs, including provincial branches.

The tax office has recently been empowered to enable it to put recalcitrant taxpayers in jail without a court trial.

Some analysts, however, have suggested that the government could increase the current 10 percent VAT rate by between 1-2 percentage points. They also suggested a raise in the tax rate for alcohol and tobacco, although acknowledging that the extra collection from those would be relatively small compared to improved tax administration.


Rising tax revenue collection

Year Revenue

2000 Rp 101.44t* 2001 Rp 179.89t 2002 Rp 219.63t 2003 Rp 254.14t 2004 Rp 271.02t**

* April-December 2000, the start of the new calender year system (previously the budget was based on fiscal year) * Forecast