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.