Page 9 - Working Paper (Tax Policy Options during Economic Downturn)
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DDTC Working Paper 1315

                        No  Enforcement      Strategies
                          6  Containing the growth  •  Identifying high-risk sectors and developing an understanding of taxpayer behavior in those
                            of the cash economy  sectors;
                                             •  Encouraging compliance through proactive and innovative measures;
                                             •  An escalated regime of enforcement methods;
                                             •  Partnership with relevant civic associations that may influence cash economy businesses.

                        Source: Brondolo, John, 2009

                   3. Indonesia Economic Outlook and Tax            consumption expenditure grew at a moderate
                   Policy Measurements                              4.7  percent  (year-on-year)  for  a  second  quarter
                                                                    of  2015.  This  compares  with  an  average  growth
                          whIle aT The fIscal sIdes, mInIsTry       rate of 5.4 percent y-o-y in 2012 to 2014 that have
                        of fInance coordInaTes wITh oTher           translated  into weaker  consumer  sentiment and
                              lIne mInIsTrIes exercIse fIscal       lower  household  spending  this  year.  Moreover,
                              sTImulus polIcIes To leveraGe         imports also contracted significantly due to weak
                        currenT sTaTe of domesTIc demand.           domestic  demand. In addition, sluggish demand
                                                                    of  our  commodity  products  from  China  created
                                                                    lingering problem with our exports. The economic
                      Emerging markets including Indonesia remains
                                                                    stimulus from higher  public infrastructure
                   fragile to the current uncertain global financial and
                                                                    spending is expected only towards the end of 2015
                   economic environment.  World  main  commodity
                                                                    with limited impact on GDP growth in 2015.
                   prices plunge to the lowest in the last five years,
                   mainly from less-than- expected China’s economy     In terms  of  challenges and policy options
                   growth. According to the latest publication of the   related  to  tax collection, Indonesia  has  been
                   World Bank , the projected 2015 economic growth   contemplating  and exercising  different strategies
                   will only be at the level of 4.7 percent or below the   over the last  decades.  After the Asian Financial
                   Government of Indonesia’s official figure at around   Crisis in 1998 , the Government of Indonesia has
                   5 to 5.2 percent. Ministry of Finance and Central   been conducting four major tax  reforms  initially
                   Bank  of  Indonesia  has  intensified  coordination   as a  response  of the crisis  where those focus on
                   through policy mix. At the monetary sides, BI (Bank   modernization  of tax  administration.  According
                   of  Indonesia)  maintains  tight  monetary  policies   to  Rizal  (2012) ,  any government  needs to take
                   by keeping its rate at the same level (7.5 percent)   into account  the concomitant  tax  administration
                   for over four months and also implements macro-  reform, since weak tax administration will become
                   prudential approaches  to improve the economy    obstacle for achieving the objective of tax reform.
                   such  as  lowering  loan-to-deposit  ratio  as  to   The objective of the reform is to create more public
                   escalate credit growth and purchase of SBPU (Surat   trust in the Directorate General of Tax (DGT), more
                   Berharga  Pasar  Uang  –  money  market  securities   productive and accountable tax officer, and better
                   through open market operations. Additionally,    tax compliance. Even after a decade of tax reform,
                   there is limited scope for Bank Indonesia to loosen   tax noncompliance and corruption still cause major
                   monetary  policy,  given  sticky  inflation  of  above   constraints  to  the  effectiveness  and  efficiency  of
                   7  percent  in  recent  months,  persistent  external   tax  collection. In Indonesia, problems with tax
                   vulnerabilities, and uncertainty with respect    noncompliance and corruption are pervasive and
                   to  US  Federal  Reserve  Action  in  the  near  term.   common.
                   However, BI,  repetitively, mentions that  it  should
                   strengthen its policy coordination intensively with   The  level of  noncompliance in Indonesia  is
                   the  government  to  control  inflation  and  output   quite high and, in most cases, will increase during
                   volatility; and commints to be more transparent in   the crisis.  One  of the modernization program’s
                   its communication strategy.                      guiding principles for improving compliance is to
                                                                    make the tax system easy for taxpayers to comply
                      While  at  the  fiscal  sides,  Ministry  of  Finance   with .  According  to  the  IMF  (1998),  the  current
                   coordinates with  other line  ministries  exercise   tax  system poses major compliance  burdens for
                   fiscal  stimulus  policies  to  leverage  domestic
                   demand.  Main  drivers  of  domestic  demand,
                                                                    20. The crisis erupted  in Thailand around July 1997. Thailand was
                   i.e.  private  consumption  and  fixed  investment,
                                                                    heavily relied upon short-term capital flows to finance its economy. These
                   keep at a positive growth although at the slower   conditions were also accompanied by lax regulation on investment and
                                                                    corrupt bureaucracy.
                   pace compared  to  the previous  year. Private
                                                                    21. Rizal, Yond (2012),”Lessons from Indonesian Tax Administration
                                                                    Reform Phase 1 (2001 – 2008): Does Good Governance Matter?”
                   19. The World Bank (2015),”Indonesia Economic Quarterly”, July.  22. Rizal (2012), op cit.
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