Page 10 - Working Paper (Tax Policy Options during Economic Downturn)
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DDTC Working Paper 1315

                   taxpayers  in terms of uncertainties in the laws    As abovementioned, this year the government
                   and countless regulations,  complex tax  returns,   has  conducted  various  fiscal  and  monetary  mix
                   excessive information reporting requirements, and   policies to anticipate challenging global economic
                   poor taxpayer services . These  costs discourage   trends that  affecting  Indonesia’s economy.
                   voluntary  compliance and have contributed       Following  budget  revision  in  January  2015,  the
                   significantly  to  the  large  numbers  of  taxpayers   government needs  to execute its reform  agenda
                   who, intentionally or unintentionally, fail to fulfill   that  are particularly focusing on infrastructure,
                   their tax obligations.                           maritime, agriculture, and  social programs.
                                                                    Effective execution of the budget  will  require
                      To improve taxpayer’s compliance, the DGT has   increasing in budgeted revenues. However,  the
                   formulated and implemented strategies on program   government will  likely face the challenge  of
                   and activity that  can keenly increase taxpayers’   adjusting spending  to account  for  lowers  than
                   attentiveness and voluntary compliance, especially   expected realized revenues. Tax revenue accounted
                   for  the  non-compliance  taxpayer  and  effective   only 94 percent of the 2014 revised budget target
                   law enforcement .  For  a  system  based  on  self-  of IDR 1,635.4 trillion.
                   assessment to be effective, taxpayers must believe
                   that if they or their competitors fail to comply with   Lower  value-added  tax  (VAT)  growth  was  a
                   their tax obligations, there is a reasonable chance   major contribution to the weak  performance of
                   that they will be detected and fined. Once they are   revenue  in  2014.  VAT  collection  growth  in  2014
                   caught, sanctions will be imposed and are sufficient   was  only  5.8  percent,  relative  to  an  18.8  percent
                   to offset the potential benefits of noncompliance .   average  for  2009  to  2013  and  only  85.1  percent
                                                                    relative to the revised 2014 Budget target. Recent
                      Transformation  of  an  ICT  system  is  very
                                                                    announcement to extend  tax  holiday from the
                   important key factor that will enhance transparency
                                                                    current 10 years to a maximum 20 years intends
                   and  improve  tax  compliance  rate.    The  DGT  has
                                                                    to attract more foreign direct investments and
                   also developed the data processing  center  that
                                                                    support employment creation. Eventually, an
                   gathers data from tax returns, tax payments, and
                                                                    increase in employment  leads to positive private
                   third-party reports.  Improvement in an ICT system
                                                                    consumption growth and  provide multiplier effect
                   has also shortened the filling process and reduced
                                                                    to  VAT  revenues.  The  government  also considers
                   interfaced communication  between tax  authority
                                                                    implementing  cash transfer program  to help the
                   and payers. In essence, an increase in tax revenue
                                                                    poor and push private consumption as an engine
                   may come from sustainable administration reform
                                                                    of growth.
                   that  can overcome the present shortcomings
                   such as inadequate legislation, poor organization,   At the end of this year, the government sets a
                   inefficient human resources of DGT, and pervasive   relatively optimistic target of IDR 1,489 trillion for
                   corruption. However, external  factors  such as   tax revenue as stated in the revised budget. In the
                   changes of  economic  trends  would also have a   first five month of 2015, total revenue only reached
                   tremendous  impact to  tax  revenue. The  current   IDR 533.4 trillion or represents only 30.3 percent
                   reform has led on the improvement in the number   of the annual  target,  compared with  an  average
                   of registered taxpayers. The number of registered   of 35.3 percent in the last five years. Nominal tax
                   taxpayers increased significantly from 2.52 million   revenue  declined  by  1.3  percent  y-o-y in January
                   in 2001 to around 4 million in 2005.             to  May  2015,  in  sharp  contrast  to  the  targeted
                                                                    increase of 30 percent for a full year in the 2015
                      In 2005, the DGT launched a crash program on 10   revised  budget .  Revenues  from  all  major  tax
                   million of Tax Identification Number (TIN). Millions   categories contracted, with the exception of non-oil
                   of  new taxpayers  were  netted  on this  program   and gas income taxes, which contributed a positive
                   through data of property and car ownership, credit   3.5 percentage points to the nominal year-on-year
                   cards,  and  other  financial  transactions.  Sunset   growth of total revenues.
                   Policy, classifies as revision amnesty that granted
                   by the GOI to noncompliant in 2008, contributed to   Moreover,  during  half  period  of  2015  receipt
                   the increasing number of taxpayers of around 5.36   from  value  added  tax  (VAT)  declined  by  4.7
                   million  people  and  as  much  of  IDR  7.46  trillion.   percent  y-o-y, contributing to  one  percent  y-o-y
                   However, as of January 2009, the ratio of stop filer   to overall  nominal  revenue  growth.  This in line
                   is pretty high at approximately 47.39% .         with the weaker growth of domestic consumption
                                                                    and  drops  in  imports  during  the  first  quarter  of
                   23. The Government and National Parliment are currently in the process
                   of revising Tax Law which will be enacted in 2016.
                                                                    taxpayers who stopped filing their return  and keep filling their return.
                   24. Rizal (2012), op cit.                        Among the effective registered taxpayers, not all of them report their taxes
                   25. Directorate  General  of Tax, Ministry of Finance  (2003),”Strategic   correctly as reflected in the result of the tax audit. However, there were
                   Paper of the DGT, Ministry of Finance Decree No. 85/KMK.03/2003.  many cases of accidently under-reporting tax filling.
                   26. Ratio of stop flier is the ratio between the number  of registered   27. World Bank, op cit, page 12.
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