How-tos of doubling income tax revenue

By J. S. Uppal and Sukanto Reksohadiprodjo

YOGYAKARTA (JP): The assertion that the government of Indonesia must increase tax revenue during the forthcoming budget year to keep the government running without a huge fiscal deficit, and also without increasing the already crushing burden of foreign debt, needs no emphasis.

The finance minister strongly stressed this view during a recent House of Representatives hearing on economic policy. It has been emphasized that tax revenue has to be increased by several points as a percentage of the gross domestic product to achieve self-sustaining growth. This task may look difficult indeed, particularly in view of the recent economic crisis.

However, in our view, tax revenue can be increased significantly (maybe doubled) by reducing the wide gap that exists between potential and realized tax revenue, even during these hard times. We recommend quick and simple changes in a few rules instead of changing the tax laws, which of course would take maybe a year or two of in-depth study.

We explain below a few short-term administrative changes to enhance tax revenue and long-term policies to increase tax potential itself. As said earlier, presently there exists a large gap between potential and realized tax revenue, even within the existing tax laws. The main reason is massive tax evasion by potential taxpayers who, although they have taxable income, simply do not file tax returns.

According to statistics compiled by the Directorate General of Taxes, out of a total population of about 207 million, only 1.26 million individuals had tax registration numbers in January 1998. This comes to a woefully low 0.6 percent.

To make the situation worse, out of the number of registered taxpayers, only 55 percent cared to file tax returns. This reduced the percentage of taxpaying individuals to a pitiful 0.33 of the total population. This figure is between 1.5 percent and 3 percent for other Asian countries.

In India, which has a very low per capita income of US$390, or about a third of that of Indonesia -- which had a per capita income of $1,110 in 1997 -- 2 percent of the population filed tax returns.

And India expects this figure to increase to 2.5 percent next March. This is more than six times that of Indonesia. Use some simple arithmetic: if the 0.33 percent of people who filed tax returns in 1997/1998 paid a total of Rp 29.2 trillion (US$4.2 billion at the current Rp 7,000 exchange rate) in individual taxes, just estimate how much the country could expect to collect if the number of people filing tax returns was raised to even 1 percent: three times the present figure. Is doubling the figure of income tax revenue realistic? Let us just think.

The important question is how to increase the number of people filing income tax returns by three fold. The first step is to register more potential taxpayers. But this will not be sufficient since, as said earlier, only 55 percent of registered individuals filed tax returns. Then how to enforce the filing of tax returns?

There is a presumptive income technique where we identify individuals as potential taxpayers, taking into account their expenditure patterns. We take expenditure on certain goods and services as an indication of their income within the range of taxable income.

Based on our study of literature and the expenditures of Indonesian households, we maintain that an individual who meets one or more of the following criteria has a very high probability of having the income level to make him or her liable to file an income tax return: ownership of a new house/apartment; ownership/lease of an automobile; having a telephone connection; possessing a passport; consuming more than 2200 kV of electricity per month; using the services of professionals in the fields of medicine, law, notary public, accountant, etc.; having a credit card.

We suggest that the users of the above goods and services be legally required to file tax return whatever their income. Of course, before filing a tax return they will have to register, but merely registering will not suffice.

Even if users of the above services do not have any tax liabilities or they paid taxes through final tax withholdings, a tax return must be filed. We will, at least, have their tax registration numbers. We propose that before obtaining the above services, they should get certification from the local tax office that they have indeed filed a tax return.

In the cases of those who are already using these services, the requirement of filing a tax return should be required at the time of the next renewal. We understand that this requirement will likely seem cumbersome and inconvenient.

In the United States, when one goes to the Department of Motor Vehicles to register an automobile, one must show a receipt saying you paid the sales tax on the vehicle. India has already introduced a scheme that requires individuals to file tax returns if they meet any of the above criteria irrespective of whether they have taxable income or not.

A proper tax educational campaign should accompany this legal requirement. Let our newly elected officials go on television telling the public how important is it to comply with the tax laws, not only as legal but also a national duty. Indonesians are second to none in having national pride if they are properly informed.

The public should also be told where their taxes go. New, simple tax return forms should be devised for lower income brackets. Assistance should be made available in the local tax offices for less informed taxpayers.

We are cognizant of problems in this proposal. The tax offices, which may be short of staff and computers, could be inundated with a large number of tax returns.

This problem is not insurmountable. There are large number of central government employees to be relocated from departments like the information and social services ministries. Let them be absorbed by the tax offices.

What about taxpayers who only have income which is subject to final withholdings? Let them also file tax returns and show zero tax liability beyond the final withholdings. Let us invest in the required computer data system to handle an increased number of tax returns. We are sure that from the cost/benefit point of view, our recommendation is sound and economical.

In the medium to long run, however, we should institute in- depth studies of comprehensive tax reforms, including changing tax laws and procedures to close loopholes which have eroded the tax base. Since we would have collected additional tax revenue through the above short-term recommendations, we could afford a year or so to consider carefully changes in tax laws and procedures rather than hurriedly introducing piecemeal policies.

J. S. Uppal, Ph.D and Sukanto Reksohadiprodjo, Ph.D are professors of economics at New York State University in Albany and Gadjah Mada University in Yogyakarta, respectively.