Manipulating invoices

The submission to the Attorney General's Office of dossiers on 51 companies in Greater Jakarta charged with tax fraud by the tax directorate general last week, is more evidence of the extensive use of false or fabricated sales invoices in Indonesia. Tax Director General Fuad Bawazier charged the companies with manipulating invoices to get larger value added tax refunds from the government.

Sales invoices are easily falsified in Indonesia by quoting a sum not equal to the sale price but a fabricated number settled upon by the seller and buyer.

Certified public accountants cannot do anything about these phony invoices, however, because the documents are legal, or at least bear formal truth. A company which uses manipulated, yet legitimate, invoices to support its financial statements can still get a clean bill of health from public accountants. This is because auditors work according to the accounting principles of the Indonesian Accountants Association which emphasize legal truth, or the conformity of transactions and other financial reports to legal documents. A full audit, although more reliable because auditors also seek material truth, is very costly and is therefore only conducted for special purposes, such as when acquiring a company.

The tax officials uncovered the invoice manipulation not with a normal audit, but through a tax audit, essentially a full audit, which looks for both formal and material truth.

Since the main mechanism of the value added tax (VAT) is a scheme whereby a company is allowed to credit the VAT it pays on inputs against the VAT it collects from the sales of its products (output), transaction invoices are the main tool for tax fraud. There are various ways in which a company can commit tax fraud. It may submit tax invoices from bogus companies to get larger refunds or submit false export documents to obtain tax refunds because exports are exempt from VAT.

The rampant manipulation of invoices is not only devastating because of the loss of government tax revenues, but also because of the cost to the economy as a whole. In fact, according to Government Audit Agency reports, a main source of malfeasance uncovered by its auditors was government agencies marking up the cost of goods and services they procure.

The chief of the Government Audit Agency, Soedarjono, acknowledged in the middle of last month that proving price mark- ups was difficult due to the virtual absence of information on market prices. He said the price information system in the country isn't transparent yet. In Singapore, by contrast, getting access to comprehensive information on market prices can cost as little as US$ 10.

Martiono Hadianto, the director general at the finance ministry in charge of supervising state companies, also recently admitted in Medan, North Sumatra, that many state plantation firms had been dictated to by outside suppliers. His remarks implied that suppliers of goods and services deliberately inflated their prices in collusion with the directors of state plantation companies.

Many analysts contend that the tax directorate general's discoveries are only the tip of the iceberg of invoice manipulation in the country. Our tax administration system is only able to detect the most obvious or flagrant manipulations. Moreover, the need for tax auditors far outstrips the supply. Hence, companies and businesspeople can easily be asked to collude in invoice manipulation because the risk of being caught is very slim.

However, tax revenue losses are not the only damage incurred by invoice manipulation. Price mark-ups have also been identified as a main reason behind bad loans and a major cause of the high- cost economy. It is therefore imperative that the government make the bidding process for the procurement of goods and services more transparent. The tax directorate general also needs to develop a intelligence network of market information to crosscheck the validity of sales invoices.