Jailing tax evaders

Jailing tax evaders

The Directorate General of Taxation will soon be able to put its
money where its mouth is under a joint decree of the Ministry of
Finance and Ministry of Justice and Human Rights that allows for
the jailing of uncooperative taxpayers for a maximum one year
without prior trial.

The decree will give teeth to the directorate's campaign to
crack down on delinquent taxpayers that was launched last
September in a concerted effort to collect Rp 19.6 trillion
(US$2.1 billion) in tax arrears and to promote tax compliance.

The Jakarta tax office had warned, through newspaper
advertisements in early October, more than 175 delinquent
individual and corporate taxpayers that if within 14 days after
the public notice they had not settled their tax liabilities they
could be jailed in lieu of their tax arrears.

However, the warning seemed ineffective to force delinquent
taxpayers to settle their liabilities because the directorate did
not get the full support of the Ministry of Justice and Human
Rights, which administers penitentiaries. But the joint decree
will provide stronger authority to tax officials to act.

Imprisonment is one of several repressive measures the
directorate is authorized to take against recalcitrant taxpayers
with liabilities of more than Rp 100 million (US$11,100). Laws
No.16 and No. 19 and Government Regulation No.137/2000 regarding
general directives on tax administration and tax collection also
fully empower the tax office to seize in distress, and eventually
auction, the assets of delinquent taxpayers without the virtue of
a court decision. Uncooperative tax debtors can also be banned
from traveling abroad.

But thus far, many tax-assessment disputes or problems of
delinquent tax obligations have been resolved through
questionable negotiations between taxpayers and tax collectors,
resulting in low receipts for the state because a great portion
of the settlement amount went into tax officials' pockets.

Moreover, the provisions that authorize tax officers to
foreclose the assets of tax debtors had mostly been rendered
ineffective in recovering tax arrears because delinquent
taxpayers had liquidated or transferred their assets before tax
officials moved to seize the assets.

Even though the treatment of jailed delinquent taxpayers will
not be as harsh as that accorded to ordinary prisoners, as the
tax debtors will not be classified as criminal convicts, robbing
such well-heeled persons of their freedom could be quite
effective in forcing them to resolve their tax liabilities.

This vigorous tax-collection campaign should be welcomed as a
fresh initiative to nurture a culture of willingness to pay taxes
in the country, which has been notorious for wide tax evasion and
corrupt tax officials.

Just look at the low rate of tax collection in the country.
For the current fiscal year, for example, total tax revenues are
estimated at only about 13 percent of gross domestic product, as
against 25 percent to 40 percent in other ASEAN countries. Most
analysts have estimated that tax collections remain very small in
proportion to the potential revenue, or around 50 percent of
corporate and personal income tax and 55 percent of value-added
tax.

Obviously, tax evasion and fraud could occur in any tax
system. But tax noncompliance in Indonesia is unusually extensive
due to the small chance and low costs of being caught, collusion
with corrupt tax officers and an inadequate number of competent
tax auditors.

However, as far as Indonesia is concerned, the low rate of tax
payments should also be blamed on the public's negative
perception of the government as a corrupt system. Many potential
taxpayers might simply ask themselves why they should pay taxes
if most of the money eventually ends up in the pockets of corrupt
officials.

Hopefully, the tougher law enforcement measures will encourage
a higher degree of tax compliance. Jailing several delinquent
taxpayers in lieu of their tax liabilities would go a long way in
helping build up a strong deterrent to tax evasion.

The public shaming of delinquent taxpayers through public
notices in newspapers could discourage taxpayers from trying to
evade their tax obligations and would make tax collection
measures much more transparent, thereby minimizing opportunities
for collusion between tax officials and taxpayers.

However, the more vigorous tax law enforcement should also be
supported by a more efficient, credible and competent tax court
as many taxpayers could then take legal recourse through such a
court.

The tax office should improve its administration service and
audit capability to make it highly credible. Too frequent
disputes or differences in the interpretations of tax laws could
breed an environment of distrust between tax officials and
taxpayers.

However, repressive measures alone will never be able to
nurture a culture of tax awareness. The number of auditors will
never be sufficient to serve taxpayers, whose number should
naturally increase steadily along with the progress of economic
development.

The final objective should be to nurture tax awareness and
voluntary tax compliance, but this condition ultimately depends
on how credible and accountable is the government in the public's
perception.