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.