Tax certainty, not tax relief

Tax certainty, not tax relief

The government plan to lift 10 percent value-added tax (VAT)
from the import of certain categories of capital goods and basic
materials will give agriculture, forestry, fisheries and animal
husbandry businesses a shot in the arm, as the facility will
reduce their capital and production costs.

However, this VAT relief is not what national and foreign
businesspeople have been demanding since 1998. What they really
need is certainty in tax law enforcement, equality for both
taxpayers and tax officials before the tax laws, an expedient
system of redressing taxpayers' grievances and an independent and
technically competent tax court.

Problems in these areas, investors contend, inflict much
higher costs than whatever benefits might accrue from the
temporary lifting of taxes on certain incomes or goods and
services.

Foreign chambers of commerce and national businesspeople have
often complained that the current tax laws, last amended in late
2000, give tax officials too much discretionary power. The system
of penalties is designed in such a way as to convey to the public
the perception that taxpayers always have a high propensity to
evade or cheat on their obligations, while tax officials are
mostly honest civil servants, strongly averse to corruption.

Contrary to the message of the law, however, most opinion
polls, including the one cosponsored by multilateral agencies
such as the UN Development Program and the World Bank in 2001,
placed tax and customs services as among the most corrupt state
institutions in Indonesia.

Take for example, the issue of tax refunds, raised by the
private sector Committee for National Economic Recovery in
another article on page 7.

Since corporate taxpayers are required by the law to pay a
monthly installment on their income tax due in the current year
on the basis of their previous year's income, there are always
many companies that overpay their tax because, by the end of the
year, they turn out to book smaller incomes than expected.

The biggest headache, though, is that these companies are not
entitled to an automatic refund but have to undergo comprehensive
tax audits. What, then, is the meaning of the self-assessment
principle, as adopted in the national tax system, if many
corporate taxpayers always end up with having their tax returns
audited by tax officials?

Yet more detrimental to taxpayers' cash flow are audit
procedures that are so loose -- without prescribed time limits --
and an audit scope so broad that taxpayers are at the mercy of
auditors. No wonder many companies often opt for a shortcut by
"colluding" with tax officials to expedite the refund.

It would be much more sensible and, most importantly, more
conducive to investment, if tax audits were done selectively,
meaning that an audit would be warranted only after examination
by tax officials had produced strong, legally admissible evidence
that the taxpayer had not filed his tax returns correctly.

Such a system would not only allow for better-targeted audits
and more efficient deployment of tax officials to achieve optimum
results, but would also reduce the cost of -- and consequently
encourage -- tax compliance.

This would also release a larger number of tax officials to
carry out other basic tax administration services, such as
identification and registration of new taxpayers, collection of
additional information from third parties on existing taxpayers,
accessing asset ownership information and carrying out taxpayer
education to help taxpayers reduce the cost of their tax
compliance.

Continuous gathering of information would eventually build up
a reliable database that could function as an intelligence
information system within the tax service to net new taxpayers
and detect tax evasion.

After all, the overall goal of tax administration is to ensure
fair and impartial treatment of all taxpayers, so that actual
taxes paid are reasonably close to the legally-defined tax
liabilities due, taking into account the limitations imposed by
the complexities of economic transactions and legitimate
differences in interpretation of the tax laws.

The current tax laws are also perceived as too repressive in
nature, focusing on the collection of revenues at the expense of
new investment, thereby preventing the birth of many corporate
taxpayers in the first place.

For example, even though taxpayers can produce strong, legally
admissible evidence to dispute officials' assessment of their tax
liabilities, their objections are processed only after they have
paid at least 50 percent of the tax under dispute. This procedure
certainly affects taxpayers' cash flow, as the objection and
appeal process often takes up to one year.

So, all in all, as the Committee for National Economic
Recovery argues, the government should amend the current tax laws
to provide what businesspeople call a tax-neutral principle. Put
another way, the tax service should focus on a client service
orientation to taxpayers, rather than treating all taxpayers as
potential cheats.