Efficient tax collection high on the agenda in Indonesia

More efficient tax collection is a top priority for Indonesia, with improved information sharing with foreign countries among the initiatives it has rolled out in service of this goal. The country has historically struggled to achieve its annual tax collection targets, despite the valuable revenue stream they represent, although recent moves by newly elected President Joko Widodo indicate the situation may soon change.

The new administration has set its sights high for tax collection in 2015, implementing an ambitious reform policy that will see the Ministry of Finance’s (MoF) Directorate General of Taxation (DGT) transformed into an autonomous entity. The country also plans to crack down on both corruption and tax evasion, with the goal of increasing tax revenues to 16% of GDP, up from the current 12%. This will bring needed budgetary flexibility and balance, facilitating planned infrastructure spending and ultimately supporting Widodo’s 7% annual GDP growth target in the years ahead.

Collection Troubles

Tax revenues accounted for 79% of domestic government revenue in 2014, according to the Central Statistics Agency (BPS), derived from the country’s 25% tax rate for corporations and rates ranging from 5% to 30% for individuals. Outside of the business segment, Indonesia’s tax base is relatively small, considering it has a workforce of around 120m. Individual taxes in Indonesia account for just 0.4% of total tax collection, compared to 47% in the US. The informal economy comprised 54% of total employment and roughly one-quarter of GDP as of 2012, according to the BPS, while the MoF reports that there were only 30m registered tax numbers in the country as of the end of 2014, less than 15% of the population. Furthermore, the minister of finance, Bambang Brodjonegoro, estimates that less than 2% of registered taxpayers paid the appropriate taxes in 2014.

On the aggregate, Indonesia’s tax revenues typically do not exceed 12% of GDP, compared to neighbouring Singapore, with 14%, and Malaysia and Thailand, which collect around 15-17%. According to BPS figures, tax revenues reached Rp1193trn ($98.61bn) in 2013, equivalent to 11.4% of GDP. Although tax collection has shown improvement in recent years, doubling since 2008, it is a long way from Widodo’s targeted 16% ratio. The government has reached its tax collection targets only twice since 2004, and tax collection fell short of its 2014 target by nearly 8%, for a shortfall of Rp103trn ($8.5bn). According to Brodjonegoro, collection was affected by an economic slowdown in the manufacturing and mining sectors, weaker imports and a decrease in the price of crude palm oil on the global market. Recent economic developments in the country underscore the importance of improving tax collection. Indonesia’s GDP growth slowed from 7.4% in 2008 to a five-year low of 5.02% in 2014, while commodities prices have fallen since mid-2012. A recent ban on the export of certain raw materials, such as coal and iron ore, is likely to further impact revenues.

Revised Budget 

With oil and commodities prices down, improving tax collection may be the key to bolstering revenues and balancing the budget. The revised 2015 budget targets Rp1489trn ($123.11bn) in tax revenues, compared to Rp1380trn ($114.07bn) in the previous draft, for a nearly 40% increase over 2014’s realised tax revenues. Of this, the government anticipates Rp1240trn ($102.5bn) in non-oil and gas revenues, Rp188trn ($15.54bn) in Customs and excise tax, and Rp55.5trn ($4.59bn) in oil and gas income tax, according to The Jakarta Post.

The DGT plans to broaden the country’s tax base by collecting new data on current and prospective individual and corporate taxpayers, announcing plans to introduce a value-added tax on new industries such as low-cost lodging and e-commerce, in addition to lowering the price limit of items categorised as luxury, from Rp10bn ($826,600) to Rp2bn ($165,320). More significantly, the MoF and DGT are rolling out a tax reform programme, targeting corruption within the DGT, as well as individual and corporate tax evasion and avoidance, both within Indonesia as well as abroad.

Recent Reforms

At the institutional level, recent reforms are set to dramatically improve DGT operations. Stakeholders complain that Government Regulation No. 53 of 2010 and Law No. 43 of 1999 have impeded the tax office from improving hiring practises and introducing incentive-based collection activities, and employees have long complained that salaries have not increased despite rising inflation. To help improve the situation, the MoF and the Coordinating Ministry of Economic Affairs (CMEA) met in December 2014, agreeing to relax hiring and managerial regulations at the DGT. An ambitious reform programme has since kicked off: the Widodo administration appointed a new director-general of the DGT, and the government has increased allocations to the agency by Rp4.1trn ($338.91m) in its revised 2015 budget, which will be used for reforms, including salary increases of up to 250%. The DGT is expected to hire an additional 4000 tax collectors in 2015, bringing the total to 40,000.

The government has agreed to transform the DGT into an autonomous agency – a move that has been welcomed by economists. Establishing the new agency is one part of a number of planned revisions to the General Taxation System (KUP) law, which is expected to undergo considerable revisions in 2015.

Toughen Up

Campaigns to fight corruption and tax evasion are also ramping up. The DGT reportedly sanctioned 300 employees in 2014 and an additional 29 during the first two months of 2015, while a crackdown on individual tax evasion has seen the MoF ban nearly 500 individuals from leaving the country and jailed a handful of tax evaders using a practice known as gijzeling. This punishment involves imprisoning tax evaders for six months, with sentences to be extended if they fail to pay their taxes during that time.

According to the DGT’s director-general of audit and tax collection, Dadang Suwarna, the nation’s list of high-priority tax evaders in February 2015 stood at 500 people, who owe an estimated total of around Rp5trn ($413.3m). A recent agreement with neighbouring Singapore to share information and close tax loopholes should bolster collection efforts.

In addition to efforts to reduce corruption and target individual tax evaders, reforms are set to be extended to commodities exporters, who have avoided taxes using transfer pricing, whereby a company sells goods to a foreign subsidiary at below market prices to move profits offshore, thereby eroding the local tax base.

Reaction

The tax hike and ongoing reforms have been met with some scepticism, with stakeholders raising doubts that the government will be able to meet such an ambitious target. Furthermore, they worry that increasing taxation amidst falling commodities prices and global volatility could be detrimental to growth. “In this situation it is not wise to increase taxes, because our spending power decreases, which will in turn decrease exports. It is not wise to dramatically raise taxes; there should instead be moderate targets and moderate increases. If you increase taxes to the max, it will stress industry and hurt growth,” Didik J Rachbini, an economist at the Institute for Development of Economics and Finance, told OBG. To address these concerns the MoF plans to reduce tax shocks and improve compliance with pragmatic new policies. In February 2015 Brodjonegoro announced that the KUP law will be revised to include an amnesty that will waive administrative penalties and prosecutions in exchange for registration and future accurate tax reporting.

Although some stakeholders have warned that implementing such a plan will drag out the reform process, most have welcomed it. The Indonesian Employers Association (Apindo), for example, voiced its support, agreeing that the measure will help improve collection and compliance. Apindo’s deputy chairman, Hariyadi Sukamdani, told media he expected the amnesty would achieve the same success as a similar policy in Italy in 2003, which attracted an estimated €80bn in funds repatriated from Switzerland.

Carrots & Sticks

Indonesia remains committed to improving its business environment. Even as it moves to raise taxes, the Widodo administration is also looking to re-examine existing tax holiday and incentive schemes. In 2011 the government rolled out tax holidays of five to 10 years, with a 50% deduction for two years thereafter, for firms in certain sectors. Their investment needs to be Rp1trn ($82.66m) or greater, at least 10% of which must be deposited in a local bank. However, just two firms were granted tax holidays in the two years after it was issued, and the approval process remains complicated, requiring technical assessment from the Indonesia Investment Coordinating Board and approval from the MoF, DGT and CMEA.

In February 2015 Brodjonegoro announced plans to revise regulations on tax allowances and holidays, in addition to special economic zone incentives. Suggested reforms include granting tax incentives to companies that reinvest their earnings in the country and broadening the scope of industries eligible for tax breaks. The government’s reform agenda has created an optimistic forecast for 2015 both in terms of government revenues and foreign direct investment.