Nurturing tax culture

Nurturing tax culture

President Megawati Soekarnoputri set a good example of
voluntary tax compliance on Tuesday by filing her annual income
tax returns about 20 days before the deadline for the settlement
of 2003 income tax.

That was the third consecutive time that the President
fulfilled her statutory duty to declare her income, rightly
assessing her tax obligation and filing her tax returns and
paying her tax dues in a timely manner.

The President's move is highly commendable in a country where
tax noncompliance is unusually extensive due to the reduced
likelihood and low costs of being caught, collusion with corrupt
tax officials and an inadequate number of competent tax auditors.
Her action should be welcomed as a fresh initiative to help
nurture voluntary tax compliance in the country, which has been
notorious for extensive tax evasion and corrupt tax officials.

Harsher repressive measures, such as the jailing late last
year of one national businessman and one foreign businessman for
failing to settle their tax arrears, were also part of a more
concerted tax campaign.

Just look at how little tax collection has been carried out in
the country. For the last fiscal year, for example, total tax
revenues were estimated at about only 13.4 percent of gross
domestic product, as against 25 percent to over 35 percent in
other ASEAN countries.

True, tax receipts have increased sharply over the last four
years due to more vigorous tax collection and a significant
broadening of the tax base. Yet the government and most analysts
have estimated that tax collection remains very small in
proportion to the potential revenue, at around only 50 percent of
corporate and personal income tax and 55 percent of value-added
tax.

The President urged Minister of Finance Boediono, who oversees
the directorate general of taxation, to steadily improve tax
administration, increase the number of taxpayers and enlighten
the general public on the importance of taxes for the country's
development.

She especially asked the taxation directorate general to see
to it that taxpayers who have so far loyally and voluntarily
complied with their tax obligations do not turn into tax evaders
due to bad tax administration service and the apparent advantages
enjoyed by tax evaders who collude with corrupt officials.

A reasonable tax environment is indeed required to encourage
tax compliance. This means that the tax laws should be reasonable
and should be reasonably and fairly administered.

Generally speaking, tax laws can be considered reasonable if
they are neutral and efficient, relatively simple to understand
and administer, generally fair and perceived to be so, adequate
to the task of raising sufficient revenues, and stable and
predictable.

Tax administration can be considered reasonable if there is a
high rate of voluntary compliance due to efficient registration,
effective audits, enforcement and collection, and if there is
consistency and uniformity in administration. A reasonable tax
administration also requires a problem-solving mechanism (to hear
appeals and settle disputes) and penalties that are heavy enough
to discourage noncompliance. After all, the overall goal of tax
administration is to ensure fair and impartial treatment of all
taxpayers so that, within the constraints imposed by the
complexities of business transactions, actual taxes are paid
reasonably.

These, we think, are the principles that the government should
consider seriously in preparing the draft amendments to the tax
laws, which are almost two months behind schedule.

However, as far as Indonesia is concerned, the poor taxpaying
culture 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 pay taxes if most of the money
will eventually end up in the pockets of corrupt officials?"

Hence the President and the entire government also have a
responsibility to help produce a positive climate for the tax
campaign.

As long as the government is still perceived to be lax in
combating corruption, thereby allowing taxpayers' money to be
frittered away, there will be no significant improvement in the
attitude and motivation by the public to pay their taxes
voluntarily.

Tax administration will never be fully effective if
noncompliance is still as widespread as it is now. But voluntary
tax compliance cannot be nurtured only by tougher law enforcement
measures such as the jailing or public shaming of delinquent
taxpayers and the hiring of more tax auditors.

Besides repressive measures, public perception of how credible
and accountable is the government with regard to tax revenues
also heavily influences the nature of tax culture and voluntary
tax compliance.