Uncompetitive tax regime

Uncompetitive tax regime

Never have tax issues aroused so much attention as the three
tax bills the government proposed to the House of Representatives
last month. Even though the House has yet to start deliberations
on the draft legislation, the general public -- including foreign
businesspeople -- has expressed grave concerns over several new
provisions.

The keen public interest and much greater concern are quite
rational. At least six million new taxpayers will, for the first
time, be required to file annual income tax returns next year,
thanks to the massive taxpayer registration by the tax
directorate general since early this year.

The nationwide arbitrary taxpayer registration, which is based
on the verification of individuals' assets and financial
transactions, had, as of this month, netted around 6.5 million
new taxpayers in addition to the 3.5 million already registered
as of early this year.

No one disagrees on the urgent need to broaden the tax base
and increase tax revenues because taxes not only serve as a
fiscal instrument but also a means to enhance a more equitable
distribution of income among the people.

But of the greatest concern to taxpayers is the really
worrisome absence of clear-cut provisions on higher standards of
accountability for tax officials. Both domestic and foreign
taxpayers here are greatly worried about the widening imbalance
between the power of tax officials and the rights of taxpayers.

Tax officials remain conveniently subject only to internal
control at the directorate general and the finance ministry. Tax
officials suspected of tax crimes will be examined and
investigated only by their colleagues. Taxpayers are virtually
unable to stand up for their rights in dealing with the tax
bureaucracy.

A recent World Bank survey, for example, rated Indonesia's tax
regime as second worst regarding the number of types of taxes,
third worst for the time it requires of the administration and
third worst for its effective rate of almost 39 percent. The
country is much less competitive even against its neighbors due
significantly to its inefficient and corrupt tax regime.
The new tax laws will authorize the tax directorate general to
access data on taxpayers' assets, business and financial records
from banks and other state and private institutions as well as
such professionals as accountants, notaries public and
consultants in light of assessing tax liabilities or verifying
tax compliance.

This broader authority, though needed to widen the tax base
and strengthen law enforcement, will inhibit rather than
encourage tax compliance if there are no safeguards to ensure
equality between taxpayers and tax officials before the law.

The requirements and procedures for tax examination and audits
also remain relaxed, without a prescribed time limit and without
a specified scope for audit work, thereby putting taxpayers at
the mercy of tax auditors, who have long been perceived as among
the most corrupt public officials.

The new package of three tax reforms -- on the general rules
and procedures for taxation, on income tax and on value-added and
luxury sales tax -- should be designed in such a way as to
encourage a high rate of voluntary tax compliance, to improve
consistency and uniformity in tax administration, to resolve
problems (grievances and complaints) and to increase the costs of
tax evasion.

It is much better to have a low effective tax rate with a high
rate of voluntary tax compliance, unlike now where the tax ratio
against the gross domestic product is only about 13.5 percent,
compared to 20 percent in Malaysia.

The government should realize that, in so far as personal
income tax is concerned, the tax culture has always been low
across the nation due to two several factors.

During the authoritarian rule of Soeharto until early 1998,
oil and gas tax receipts were still big enough to meet the fiscal
needs without concerted tax efforts. This can be noted from the
tiny number (3.5 million of 220 million people) of personal
income taxpayers already registered as of early this year.

Corrupt tax officials and high venality within the public
administration have further discouraged voluntary tax compliance.

But since the country has now become a net oil importer, other
economic sectors outside the oil and gas industry should now
account for almost 80 percent of all tax receipts. Hence,
broadening the tax base is the only way of continuing sustainable
development.

However, broadening the tax base is not a matter of simply
drafting and implementing new tax laws, because this process also
requires drastic changes in tax administration (tax directorate
general). Changing the administration system is not easy either
because the system reflects the social and economic condition,
income distribution and public attitude toward the government.

Put another way, besides strong law enforcement, the people's
perception of their government also significantly influences the
willingness of taxpayers or potential taxpayers to voluntarily
comply with their tax obligations (high tax culture).