Rationale of additional tax reform

Rationale of additional tax reform

Sofjan Wanandi, Chairman, Committee for National Economic Recovery
(KPEN), Jakarta

The government has often boasted of its success in achieving
tax revenue targets as set in its state budget. This claim is
correct if the refund that has yet to be resolved is overlooked.
But given the current tax system, a question arises as to whether
the performance of tax administration in term of the revenue
does give a true picture of the situation. In other words,
whether the revenue has represented a net figure rather than a
gross figure.

The question is related to refunds that have not been
realized, including those based on the rulings by the tax court.
If this is taken into account the tax revenue will likely be much
less than what the government likes to claim.

This condition is certainly not conducive to investment, which
has already been stifled by the uncertainty caused by the war in
Iraq and other external and internal factors.

What is then the most appropriate approach to achieve the two
goals at the same time, i.e. to enhance tax revenue without
impeding investment.

The best approach is to embark on another tax reform, legally
and administratively. Ideally, tax reform aims at eliminating
defects in the current laws, or adjusting the policy best suited
to current development. Based on current laws and their
implementing regulations, tax reform should cover two main areas,
namely the law on taxation procedure and the income tax law and
the value added tax law.

The amendments of tax laws initiated in 2000 put too much
emphasis on revenue while other factors that may contribute to
tax revenue in the long run have been overlooked. The law on
taxation procedure addresses the issue as to how tax compliance
is carried out by taxpayers on one side, and how the enforcement
is conducted by tax administration on the other side.

Ideally, the law on procedure that is supposed to prescribe
the procedures for tax compliance and its enforcement should
clearly stipulate that taxpayers' rights and obligations. It
should also guarantee that the enforcement by tax administration
does not go beyond what has been stipulated in the law.

But the current practice does not indicate the proper
philosophy of the procedure. And most crucial is that in
complying with the tax law taxpayer and tax administration should
be on equality in term of their obligations to the laws. In other
words, should a taxpayer not comply with the law it must be
penalized in accordance with the law. And the same principle
should also apply to tax officials who implement the law in
breach of the provisions contained therein.

Thus, the recommendations on issues governed by law on
procedure are focused on two main issues: First, provisions that
stipulate tax audit, and second is to protect taxpayers' rights,
especially in the areas of refunds and objections.

Income tax and value added tax reform should serve two main
goals -- to enhance tax revenue and to establish a favorable
investment climate. The two objectives seem to be contradictory
but actually they are not.

The revenue enhancement should be directed to transactions
that have not been properly addressed in the law, while a
favorable investment climate does not necessarily mean granting
tax incentives. A conducive investment climate can be achieved
through the adoption of "tax neutral principle" and establishing
legal certainty.

Again, the tax amendment initiated in 2000 did not address
issues that encourage investment.

In general terms, the law on taxation procedure provides
taxpayers' rights and obligations. But under the current
provisions, some of them do not reflect the quality of position
between taxpayers and tax officers in front of the tax laws. And
this is clearly evident in the area of tax audit and refund.

Under the self-assessment system the role of tax audit is to
ensure that taxpayers abide by the law. It is carried out to
ensure that taxpayers fully disclose their income but this is
possible only if certain conditions are met.

The caveat, though, is that the current law also provides that
the purpose of audit is to make sure that taxpayers comply with
the law and for other purposes.

The effect of the broadening of the definition is that tax
audits can be conducted for broader purposes in addition to
securing the self-assessment system. The effect is that the self-
assessment system has become an official-assessment.

There are several approaches to address the issue: First, the
tax audit is conducted to ensure that taxpayers comply with the
law under self-assessment system, and second, the audit is
carried after examination is done. In such a case the definition
extends to cover both the terms "tax audit" as well as
"examination".

In addition, certain conditions should be met prior to the
conduct of tax audits. This issue is closely related to the
"audit selection" criteria. Under the present practice, there are
a number of criteria used to carry out audits, such as tax
returns that shows losses, claims for refund, liquidation etc.
The criteria is so broad that practically nearly all taxpayers
are liable to tax audits.

One of the appropriate approaches is that tax audits should be
used as a tool to ensure that taxpayers have complied with the
law. In other words, audit selection criteria is set within the
framework of a self-assessment system. It will be conducted only
if tax administration has reliable data that has not been
reported in the tax return. Prior to the audit an examination
should be carried out to ensure that the targeted taxpayer has
not fully disclosed his income.

The law stipulates that as a result of an audit, an assessment
notice will be issued where it requires an additional tax payable
plus penalty. However, the law does not explicitly prescribe the
penalty applicable to tax officials in case there is an abuse in
the tax audit process. The law merely refers to penalty
stipulated in government regulations that governs the conduct of
civil servants. This will not deter delinquent tax auditors to
abuse their power for their own interest.

KPEN is a forum of the private sector to advise the government
on economic issues.