Reform in tax regime not going anywhere

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.