Incremental tax reform

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.