Thu, 14 Oct 2004

Tax uncollected

Taxation Director General Hadi Purnomo's estimate of Rp 676.5 trillion (US$74.34 billion) in potential tax revenue lost annually during the past three years seems to be too high -- a sum 240 percent larger than the Rp 272.17 trillion tax receipt target set for this year.

This is not, however, to deny the blunt truth that tax evasion has always been pervasive in this country, as can be noted from its tax ratio (tax receipts as a percentage against gross domestic product) of only less than 13 percent, compared to between 17 and 20 percent in other ASEAN countries.

Most analysts and tax auditors have estimated that tax collections in Indonesia have remained small in proportion to the potential revenue, or only around 50 percent of corporate and personal income tax and 55 percent of value-added tax.

The main reasons behind the high incidence of tax non- compliance have often been cited. Among them are the small chance and low cost of being caught, collusion with corrupt tax officials and the inadequate number of competent tax auditors.

However, Purnomo, speaking at a seminar on Tuesday, cited another major factor behind the pervasive tax evasion. He said many laws and regulations severely restricted the access of tax officials to records of financial transactions, which had enormous potential tax revenues.

He said the government could in theory collect annually Rp 252 trillion in tax receipts from bank deposits, Rp 243 trillion from foreign exchange transactions, Rp 180 trillion from bad loans and Rp 1.5 trillion from credit cards. But these potential tax revenues cannot be collected because tax officials are unable to check the records of financial transactions.

The tax chief seemed to be frustrated about the acute lack of cooperation on the part of other government institutions with regards to the tax officials' access to verify taxpayers' financial records.

Although access to records of financial transactions may sometimes be meaningless in a country where documents or records can so easily be falsified, Purnomo did have a legitimate point.

Large sums of additional tax revenues, whether from income, value-added or property taxes, could have been collected had tax officials had a broad authority to corroborate or cross-check records on taxpayers.

For example, taxpayers may understate their taxable income with fake documents. However tax officials can still uncover tax underpayment by verifying the taxpayer's records of electricity or phone bills, car ownership and other assets. But this verification is possible only when tax officials have access to taxpayers' records.

Tax officials' inability to cross-check taxpayers' income data with their records of expenditure and current (financial) and fixed assets is indeed one of the main reasons behind the pervasive tax evasion or tax underpayment.

However, instead of only blaming conflicting rulings in several laws and regulations and the uncooperative attitude on the part of other government agencies, officials in the taxation directorate general should ask themselves why the government has not yet vested tax officials with so broad an authority to open records on various financial transactions.

The reason is an extreme lack of trust. International and national opinion polls have always placed the taxation directorate general, along with the customs directorate general, among the most corrupt public institution in the country.

As long as the taxation directorate general has not improved its integrity through a more efficient, transparent administration tax system, there will always be strong political opposition to providing tax officials with wider access to taxpayers' records, fearing that such power would be abused.

In fact, the business community has been complaining of what they consider is too much discretionary power in the hands of tax officials to interpret and enforce the tax laws.

Certainly, these issues should be among the problems to be addressed by the proposed amendments of the 2000 tax laws that are slated to be enacted later this year. This should not, however, mean the law amendments should provide tax officials with automatic, unlimited access to taxpayers' financial records and transactions.

Tax officers do need bigger authority to open taxpayers' financial data, to detain tax evaders and to foreclose on the assets of tax evaders but only in relation to investigation of tax crimes and selective tax audits.

But a broader and stronger authority should be accompanied by higher standards of accountability and should be supervised with clear-cut rules that stipulate stringent requirements tax officials have to meet to be able to open taxpayers' records on income, spending and assets. This means that the authority to open data on taxpayers should be used only sparingly and only when there were strong suspicions of tax evasion or other forms of tax crimes.