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.