Tax reforms inadequate

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.

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