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.