Reform in tax regime not going anywhere

Rendi A. Witular, The Jakarta Post, Jakarta

Rising public expectation over a substantial reform in the country's tax regime seems to be fading away now as vested interests within the Ministry of Finance's Directorate General of Taxation have stalled the deliberation of the tax law amendments.

With the delayed reform, uncertainty over tax law enforcement and corruption within the tax office have spawned uncontrollably, scaring away foreign investors at a time when the country is in dire need of investment in order to create more jobs.

The good intention shown by President Susilo Bambang Yudhoyono to accommodate the needs of the business community during the drafting of the amendments, by involving the Indonesian Chamber of Commerce and Industry (Kadin), has not received a warm welcome from tax officials.

"There is actually progress in tax reform, in the sense that there is already good will from the Susilo administration. But implementation has not been easy following opposition from the bureaucracy level," said senior auditor John A. Prasetio, who is also Kadin vice chairman for international economic cooperation.

Bureaucrats who remain in power, despite a change in the country's leadership, maintain the status quo for their own interests or those of the group.

There was hope early this year for an overhaul in the tax system when representatives from Kadin and the Ministry of Finance's Directorate General of Taxation agreed to jointly draft tax law amendments.

The revisions included Law No. 16/2000 on general taxation arrangements and procedures, Law No. 17/2000 on income tax and Law No. 18/2000 on value-added tax (VAT) on goods and services and luxury sales tax.

As the draft revisions were seen to accommodate the interests of both the business community and the tax directorate, the amendments were then signed by President Susilo and submitted to the House of Representatives for deliberation.

However, the amendments, which were initially hailed as business-friendly, were later found to contain unfavorable articles, which granted more authority to tax officials, who are prone to power abuse.

There was outrage among business communities after they found out that the amendments contained changes altered unilaterally by the tax officials when they were about to be submitted to the President.

Even though the House has yet to start deliberations on the draft legislation, the general public -- including foreign businesspeople -- has expressed grave concerns over several new provisions.

Part of the content includes the stipulation of criminal sanctions for simple tax assessment errors, such as forgetting to completely fill in the tax form.

The requirements and procedures for tax examination and audits also remain relaxed, without a prescribed time limit and without a specified scope for audit work, thereby putting taxpayers at the mercy of tax auditors, who have long been perceived as among the most corrupt public officials.

Taxpayers are also put in a weaker legal position in any tax disputes with tax officials, creating an unbalanced position between taxpayers and officials, especially when the tax office can confiscate assets and freeze bank accounts over any alleged tax evasion attempts.

Chairman of the International Business Chamber (IBC) Peter Fanning said there was a need for the tax office to have sufficient powers to fulfill its tax collection duties, but not at a level where those powers could be abused.

"Equality should mean that taxpayers have the right to enjoy easier tax rebate procedures and a clear and sufficient channel for filing complaints besides their obligation to pay taxes," he said.

"If the bills are not revised, we believe that it will scare away potential investors and make existing investors consider leaving," he added.

The opposition has not only caused delay in the deliberation of the bills, but more importantly it has also forced the government to delay the overhaul in the tax regime next year. As the deliberation is expected to start early next year, the government is now hoping that the reform can start in 2007.

With intensified opposition from the public, the government eventually agreed to accommodate the request for a more friendly tax regime during the deliberation, especially under the new finance minister.

President Susilo appointed former state minister of national development planning Sri Mulyani Indrawati as the new minister of finance, replacing Jusuf Anwar on Dec.5, with an aim to help improve the country's fiscal condition as well as clearing ways for a more friendly tax regime.

Aside from the debacle in the tax bills, the tax directorate has also been slow in improving its service. This is apparent from the low number of large tax offices (LTOs), which are being set up under a relatively new system for the "clean" and efficient collection and administration of taxes.

The tax directorate has been planning to apply the LTO administrative system in all of its tax offices nationwide since 2002. However, in practice, only two offices are equipped with LTO services this year, or five offices in total.

The directorate is also taking a short cut in trying to enlarge the taxpayer base by applying a nationwide arbitrary taxpayer registration scheme, which is based on the verification of individuals' assets and financial transactions.

To increase the number of taxpayers, the directorate has been sending out millions of tax number application forms to those it has categorized as potential taxpayers, claiming that it will increase the number of taxpayers to 10 million this year.

As of the end of last year, only 3.67 million of the country's 220 million population paid taxes -- just 13.5 percent of the Gross National Product (GNP) -- one of the lowest among major Asian economies.

The tax directorate claims that with an increase in the tax base this year, the government is expected to reap an additional Rp 5 trillion (US$490 million) from the added number of taxpayers this year.

However, the public may not be aware that some of the 10 million taxpayers claimed by the tax directorate may only exist on paper as the directorate could not verify the actual number of people who are truly paying their taxes.