Incremental tax reform

The new package of tax reforms the government will propose to the House of Representatives next month addresses many of the deeply rooted concerns of taxpayers over the uncertainty of tax law enforcement and their demand for equality with tax officials before the law.

The amendments the government drafted for the three laws of 2000 regarding general rules and procedures on taxation, on income tax and on value-added tax and luxury sales tax respectively streamline and simplify procedures to reduce costs of compliance and administration.

The new package of tax reforms are rightly designed to encourage high rates of voluntary tax compliance, to improve consistency and uniformity in tax administration, to resolve problems (grievances and complaints) and to increase the costs of tax evasion.

These measures will help increase tax receipts by broadening the tax base, create a sound and competitive tax system to stimulate investment and enhance justice in distributing tax burdens and voluntary tax compliance.

Among the most significant changes will be the provisions in the law on general rules and procedures on tax that will authorize the tax directorate general to access data on taxpayers' assets, business and financial records from banks and other state and private institutions, as well as such professionals as accountants, notaries public and consultants. This broad authority will greatly help tax officials in assessing tax liabilities or verifying tax compliance and identifying and registering new taxpayers.

Lack of authority to corroborate (cross check) data on potential taxpayers is one of the main reasons as to why the directorate general has thus far succeeded in registering only about 2.6 million of the country's 220 million population as individual income tax payers.

The reforms will improve certainty for the refund or reimbursement of tax overpayments -- one of the greatest complaints among taxpayers -- by setting 12 months as the deadline for the refund process. However, corporate and individual taxpayers with excellent compliance records will be able to get income tax refunds within three months at the latest and value added tax (VAT) reimbursements within one month at the latest.

However, the reforms fail to remove another great concern of taxpayers over the procedures for tax examination and audits.

The requirements and procedures for tax examination and audits remain very loose without prescribed time limits, and the scope of audits are still quite broad, thereby putting taxpayers at the mercy of tax auditors. This uncertainty is dreaded by taxpayers because the tax directorate general has always been perceived by citizens as one of the most corrupt public institutions in the country.

It would have been much more sensible if the amendments only stipulated selective audits, meaning that tax audits would be warranted only after examinations by tax officials produced strong legal evidence of non-compliance or tax evasion, or when taxpayers fail to properly file their tax returns.

An off-site tax examination, which tax director general Hadi Poernomo said last week would be introduced next month, would not help remove taxpayers' concern. Even though taxpayers and tax officials will not have physical contact because tax data and documents will be delivered through registered mail, taxpayers would still remain vulnerable to corrupt officials in so far as the procedures for and the process of tax examination and audits are not clearly defined in the laws.

What is also glaringly absent from the amendments are clear- cut provisions for higher standards of accountability for tax officials. There are no procedures for taxpayers to sue tax officials for reckless or intentional disregard of general rules or procedures on tax collection.

Tax officials remain conveniently subject only to internal control at the tax directorate general and the inspectorate general at the finance ministry. Tax officials suspected of tax crimes will be examined and investigated only by their colleagues. The amendments do not mention anything about an independent oversight commission like the one the customs directorate general will set up.

So all in all, the new set of tax reforms, already one year behind the original schedule, would at best only produce incremental, slow-pace changes targeted at specific technical and administrative areas.

We cannot expect much, especially because the amendments to the tax laws will not likely be strengthened with major structural and functional changes (transformational changes) within the tax directorate general. Like other civil servants, compensation for tax officials will continue to be based on the seniority and patronage systems, and promotion and pay increases are not strongly related to performance.

Without transformational changes within the organization, its compensation and its highly centralized bureaucracies, it is unreasonable to expect the tax directorate general, which possesses such large discretionary powers over taxpayers, to become an island of integrity in a sea of corruption.