Tax uncollected

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.