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).