Tax reforms inadequate

The new package of overall tax reforms the government will propose to the House of Representatives next month fails to address taxpayers' greatest concern over the uncertainty about tax law enforcement. Nor do the government-proposed amendments to the tax laws of 2000 meet taxpayers' demands for equality with tax officials before the law.

The amendments the government drafted for the three laws on general rules and procedures on taxation, on income tax and on value-added tax and luxury sales tax respectively not only maintain but even increase the discretionary power of tax officials in enforcing the tax legislation.

The planned revision of the tax laws, the fourth major tax reform after the first in 1983, aims at implementing overall tax policy and administrative reforms in a concerted bid to increase tax receipts by broadening the tax base, creating a sound and competitive tax system to stimulate investment and enhancing justice in tax burdens and voluntary tax compliance.

However, the amendments to the three laws fail to address the greatest concern of corporate taxpayers, which is rooted in the general rules and procedures for taxation.

What the business community really wants to see is not tax policy reform but rather tax administrative reform to improve certainty in tax law enforcement and to minimize corruption within the taxation system.

Most international analysts hail Indonesia's tax system as fairly sound because it features a modern value-added tax and income tax and has a balanced reliance on direct (income) and indirect (consumption) taxes.

But a weak, corrupt tax administration system has made law enforcement very poor and tax collection very low. International and national opinion polls on corruption in Indonesia have always placed the tax directorate general among the most corrupt public institutions in the country.

The tax ratio (tax receipts as a percentage of gross domestic product) is only around 13 percent, compared with 17 percent to 20 percent in other ASEAN countries. The tax directorate general has thus far been able to register only about two million individual income taxpayers, not including state and private- sector employees whose income taxes are withheld by their employers.

The law amendments should focus more attention on administrative tax reform through a major revision of the law on general rules and procedures on taxation. But the proposed changes to this law fail to address the most contentious issues over tax audit and tax refund, two areas most vulnerable to corrupt tax officials.

The system of penalties in the planned amendments is still 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 who are strongly averse to corruption.

The revisions to the law are seen as still too repressive in nature, focusing on the collection of revenues at the expense of new investment. They should, instead, emphasize a client-service orientation toward taxpayers and not treat most taxpayers as potential cheats or tax evaders.

The requirements and procedures for tax audits remain somewhat loose, without prescribed time limit, and the scope of the audit is so broad that taxpayers will remain at the mercy of auditors. Corporate taxpayers remain ineligible for automatic refund of tax overpayments but have to undergo comprehensive tax audits. What is then the meaning of the self-assessment principle adopted in the national tax system if most corporate taxpayers always end up having their tax returns audited by tax officials?

Tax refund will always remain a big issue in Indonesia since the tax system requires companies to make a monthly installment of their income tax due in the current year on the basis of their income in the previous year. Under this system, there is always a high probability that many companies will overpay their income tax because, by the end of the year, they turn out to book smaller incomes.

It would have been much more sensible and conducive to businesses if the amendments stipulated only selective audits, meaning that tax audit would be warranted only after examination by tax officials produced strong evidence that a taxpayer had failed to file properly his tax returns.

The amendments that will vest tax officials with greater power to investigate tax crimes, to detain tax evaders and foreclose on the assets of tax evaders should be welcomed as the right move to enhance tax law enforcement. This will minimize the involvement of the police, by and large incapable of dealing with tax technicalities, in handling tax crimes.

However, what is outstandingly missing from the amendments is that all this broader authority is not supplemented by clear-cut provisions that require higher standards of accountability on the part of tax officials.

-----30---