Tax amnesty suggestion has powerful support in Cabinet

Tax amnesty suggestion has powerful support in Cabinet

Vincent Lingga, The Jakarta Post, Jakarta

Apparently buoyed by its success in ushering in the unpopular
policy of increasing fuel prices, the government is preparing
another politically sensitive measure -- tax amnesty -- to lure
back billions of dollars, which Indonesian businesspeople
reportedly transferred overseas during the height of the economic
crisis in 1998.

Even the previous government of Megawati Soekarnoputri,
notorious for its high tolerance of corruption, scrapped the idea
of a tax amnesty, which has been aggressively promoted by the
Indonesian Chamber of Commerce and Industry (Kadin) since 2003.

Such tax relief was considered an insult to the public's sense
of justice as the scheme would benefit mostly businesspeople and
big tax evaders, allowing them to essentially launder their
hidden assets.

However the idea has gained powerful support at the center of
executive power. Former Kadin leaders' Aburizal Bakrie, the
current chief economics minister, and Vice President Jusuf Kalla,
were assigned by President Susilo Bambang Yudhoyono to conduct
the day-to-day management of the economy.

Aburizal even promoted the tax amnesty like a mantra that
could immediately generate a one-time cash infusion of at least
Rp 50 trillion (US$5.3 billion) in state revenues in return for
immunity from prosecution.

Such a huge sum of additional receipts through a one-shot deal
could indeed be quite tempting for the cash-strapped government.

Despite the risks of moral hazards and damaged confidence in
the credibility of tax-law enforcement, the tax amnesty is not
without strong rationale, especially in Indonesia where tax
evasion has always been quite extensive.

Registered personal income taxpayers are still less than 2
percent of the 120 million-strong workforce. The tax ratio (tax
receipts against gross domestic product) are less than 13
percent, the lowest among ASEAN countries.

The proponents of the tax amnesty have strong points to
support such a program, especially now when the country is
desperate for new investment to create jobs.

First, since the corruption-infested tax directorate general
is unable anyway to hunt down tax evaders and recoup their hidden
assets, there is no harm in offering them a one-shot amnesty if
the government can get a sizable amount of additional revenues.

Second, businesspeople will not hesitate to reinvest their
capital in Indonesia to expand the economy and create jobs once
their previously hidden assets are declared legitimate under the
amnesty program.

Third, the scheme will net a large number of new taxpayers,
including small and medium-scale enterprises (SMEs), thereby
broadening the tax base for future tax collection. Tax
registration also will make SMEs legitimate and consequently
improve their access to finance.

Fourth, as the court system in the country is both corrupt and
overburdened, a tax amnesty may allow the tax administration to
minimize prosecution costs.

No wonder, given these potential benefits, many countries,
including dozens of developed ones, have granted such one-time
tax amnesties.

But the opponents of a tax amnesty also have equally strong
points against introducing such a scheme, at least until an
efficient, strong tax administration system is established.

Granting an indiscriminate tax amnesty now will mostly benefit
the big businesspeople, including the former bank owners, who,
according to an investigative audit by the Supreme Audit Agency
(BPK) in 1999, misused Rp 138.5 trillion (US$15.40 billion) of
the Rp 145 trillion Bank Indonesia extended in emergency
liquidity credits to help bail out the banking industry in 1998
and 1999.

It would gravely insult the public's sense of justice if those
same conglomerates, who had previously been released and
discharged from criminal charges related to their bad debts, were
granted tax amnesty under a weak and corrupt tax administration
system.

Tax amnesty is supposed to encourage people and enterprises to
register as taxpayers and start completely new without fear of
prosecution of their past tax debts.

But granting tax amnesty without first establishing a strong
tax administration system could only be a deception to allow
tycoons to launder their hidden assets, tax-evaded money.

Successful tax amnesty programs in developed and developing
countries have shown that the facility should be provided through
a good mechanism, and the tax amnesty period should immediately
be followed by strong law enforcement against tax evaders and
manipulators.

Unless carefully designed and supported with strong
information infrastructure to detect future tax delinquency, a
tax amnesty program could instead increase disincentives to
taxpayers.

Without this prerequisite, a tax amnesty will only cause moral
hazards as people, expecting another amnesty in the future, will
lower their tax compliance, and honest taxpayers will be
discouraged to continue voluntary compliance.

A highly successful amnesty which nets a large number of new
taxpayers could even adversely affect future tax collection if
the tax administration cannot devote enough resources to handle
the additional workload.

There are thus both great potential benefits and big risks
inherent with the granting of a tax amnesty. But it depends on
the quality of the tax administration system used to implement
the program.

The government certainly is facing a mountain of work
preparing an overall tax reform program, and that includes the
drafting of a bill on a tax amnesty.

But then as the raucous opposition to the otherwise
economically rational fuel-price hikes has demonstrated, even the
best program will not sell unless it is properly marketed to
those who will implement it and the public who will have to
accept it. In the end, it is an exercise in practical politics.