Indonesia can significantly increase its tax revenues

Indonesia can significantly increase its tax revenues

Purbaya Yudhi Sadewa, Jakarta

In the 2005 state budget, the Indonesian government plans to
increase its tax revenue by Rp 25.9 trillion (US$3 billion) over
its projected 2004 figure. This is a sizable amount but should be
attainable. The government, however, does not expect the
necessary improvements in tax collection efficiency.

The economic crisis that hit the country in 1997 has left the
government with huge debts. Each year the Indonesian government
has to pay a significant amount of interest and principal on its
domestic and foreign debts, which has strained the state budget.

However, the government has to be careful in its efforts in
increasing its tax revenues, given that too high a tax rate might
hamper economic growth. As such, the government has tried to
increase its tax revenues by broadening the tax base,
and, most importantly, by increasing the efficiency of the tax
collection process.

This strategy seems to have worked well, given that revenues
from taxes have risen consistently, and the economy has picked up
its growth rate steadily in the last three years. For example, in
2001, tax revenues only amounted to Rp 185.3 trillion, but for
the year 2004 they are expected to reach Rp 272.2 trillion.
Meanwhile, the tax to GDP ratio (a ratio often used as a measure
of tax collection efficiency) rose from 11.9 percent in 2000 to
13.6 percent in 2004 (projected). Also, economic growth increased
from 3.8 percent in 2001 to an expected 4.9 percent for 2004.

Tax revenues will still play an important role in the 2005
budget plan. The government expects to collect Rp 297.8 trillion
from tax (up by Rp 25.9 trillion compared to the previous year),
which is around 75.9 percent of the total government revenue
planned for fiscal year 2005. The biggest component that
contributes to government tax revenue is income tax (47.6 percent
of total tax revenue), followed by value added tax (around 33.5
percent of total tax revenue) and by excise tax (around 9.7
percent). The government expects higher revenues in all the tax
components next year.

The government's expectation of higher tax revenues in 2005 is
reasonable enough. Economists at Danareksa Research Institute
arrived at a calculation that suggests the Indonesian economy is
currently in an accelerating phase, which should mean a faster
economic growth pace in 2005. Business sales and profits are
likely to grow at a faster rate too. This also means faster
income growth; and, therefore, higher income tax revenue for the
government.

I do not believe that the higher oil price will slow the
economy, since the government is not likely to lift fuel
subsidies next year. Danareksa's calculations show that the state
budget is still in good shape, even if the average oil price rose
from $24 per barrel (the budget's assumption) to $35 per barrel.
Furthermore, the cost of removing the fuel subsidy would be
greater than its benefits.

Removal of the subsidy would push up inflation, which would
force the central bank to hike interest rates. As a result,
interest payments on government debts would increase. At the same
time, the cost to the central bank to pay Bank Indonesia
promissory notes (SBI) interest would also increase.

However, a higher oil price might even push up tax revenue, as
long as the subsidy is not removed. Higher oil prices mean higher
tax revenue from oil and gas income tax. As such, provided that
the world oil price does not increase too steeply, the prospects
of the economy will remain bright in the near term.

Despite the expected increase in tax revenue, the government
does not seem to expect a significant improvement in the
efficiency of the tax collection process. The 2005 budget only
expects a tax-to-GDP ratio of 13.6 percent, unchanged from the
tax ratio in the previous year.

This figure is much lower than in neighboring countries.
Thailand, for example, has successfully raised its tax collection
rate from 13.6 percent of GDP in 2000 to 15.2 percent in 2003.
Meanwhile, Malaysia has also pushed up its tax collection rate
from 13.8 percent in 2000 to 16.0 percent in 2003. This data
suggests that it is possible for Indonesia to reach a tax
collection rate above 13.6 percent of GDP.

Strangely enough, the government does not seem to be
ambitious about gaining a higher tax collection rate amid the
overall tax reform, which is expected to be effective in 2005.
The tax reform will include improvement of the tax administration
and policies and amendments to the current tax laws. I believe
that, in principle, the reform should bring about more efficient
tax collection, without necessarily adding further to the burdens
of taxpayers.

A lack of improvement in the efficiency of tax collection is
bad news for business and the economy in general. It is not a
secret that the current taxation system has many loopholes that
can be manipulated by both tax officers and businesspeople alike
for their own benefit. On many occasions the business community
has accused tax officers of abusing their power, thus forcing
companies to pay taxes far above their official rates, but quite
a portion of those payments only end up in the pockets of tax
officials.

Tax reform is expected to rectify this problem. And as a
result, the tax collection rate should improve. The government
has acknowledged this problem, and has exerted its efforts to
rectify this problem by preparing an amendment to the tax laws,
which includes income tax, valued added tax and the general
provisions on taxation.

Apparently, however, the current government does not expect
too much from the reform at least for next year, as reflected in
its projected tax collection rate. Furthermore, many issues are
yet to be solved by the current tax reforms. These include
regulations on tax refunds, consistency in tax regulations and
eliminating loopholes that may create "negotiations" between tax
officers and taxpayers.

Against this backdrop, the target of the tax revenue in the
2005 budget is rather too pessimistic. Higher tax revenues can be
reached, without additionally burdens on businesses and the
economy if there is political will to resolve the problems in the
current taxation system.

The writer is a Senior Economist at Danareksa Research
Institute. This article is a personal view.