The Jakarta Post
Broadening the tax base
We should give credit where credit is due. The tax directorate general, though still perceived to be one of the most corrupt public institutions in Indonesia, deserves our commendation for its concerted campaign to broaden the tax base through income tax collections. As of early this year, a mere 1.5 percent of our 220 million population had personal tax numbers.
The directorate, instead of waiting for people to voluntarily register themselves as income tax payers, has been aggressively tracing potential taxpayers who remain outside the tax net through their property and car ownership, credit cards and other financial transactions. And based on this data, millions of new taxpayer registrations have thus far been issued and mailed to taxpayers.
The tax office expects to increase the number of registered personal income taxpayers from 3.5 million as of early this year to 10 million before the end of this month, and it will continue to broaden the tax base by at least 2 million taxpayers a year.
Certainly, the target is ambitious, and many taxpayer registration numbers may later turn out to have been mistakenly issued to the wrong people; people whose income is below the taxable income level, or to employees whose income tax has already been automatically paid by their employers.
However, this arbitrary taxpayer registration, which is based on the verification of individuals' assets and financial transactions, is still worth continuing because it will be much more effective than simply waiting for voluntary registration, which over the past 50 years has netted only 3.5 million people.
Moreover, the success rate of the arbitrary registration will still be very high, because those who reject the taxpayer registration numbers mailed to them by the tax office will have to prove why they are ineligible, otherwise they will be subject to much higher income tax rates unilaterally assessed by tax officials.
Inter-ministerial cooperation, which authorizes the tax office to access data on people's property and car ownership, represents significant progress in the national effort to broaden the taxpayer base and to prevent tax underpayment.
In fact, the draft law on general rules and procedures on tax, which was submitted to the House of Representatives last month, will broaden the tax office's access to data on taxpayers' business and financial records from banks and other state and private institutions, as well as from such professionals as accountants, notaries public and consultants.
This broader authority is necessary because simply registering potential taxpayers will not automatically raise tax revenue if the tax administration system is not capable of detecting all of the actual income of taxpayers within the country and overseas.
Moreover, registering taxpayers is only the first step in the ongoing drive to develop an effective and efficient tax administration. Registered taxpayers still have to be encouraged to voluntarily comply with their tax obligations, especially under our tax self-assessment system. Legal enforcement, though necessary to minimize tax evasion and tax fraud, is not sufficient to ensure tax compliance as there will never be enough tax auditors to examine all taxpayers. Tax compliance involves the willingness of taxpayers to pay taxes, and this in turn is influenced partly by their perception of the integrity of tax officials and the government's credibility in general. Efficient, and transparent tax administration is also crucial for minimizing the cost of tax compliance. Taxpayers will be discouraged in registering if their tax identification numbers expose them to uncertainties in tax matters, costly objections and appeal and tax-refund procedures.
Therefore voluntary tax compliance requires an environment of mutual trust between taxpayers and tax officials, unlike the current atmosphere of mutual distrust whereby taxpayers justly perceive most tax officials to be corrupt, and with tax officials considering all taxpayers as being cheats.
Given the sudden and large increase in the number of new registered personal income-tax payers, the government should expand its tax education and information campaign to help taxpayers to properly file their annual income tax returns and steadily expand its tax administrative capacity to handle the bigger workload.
Yet most crucial for generating positive response to the massive taxpayer registration is a credible tax amnesty program, which can serve as a transition mechanism to allow both taxpayers and tax officers to start anew and focus on the future. Allowing taxpayers with unpaid past taxes -- as long as they are unknown to tax officials -- to take part in the amnesty program will encourage taxpayers to come out, declare their income-generating assets and voluntarily fulfill their tax obligations
It is therefore imperative that the government and the House strengthen the current mass taxpayer registration campaign with overall tax reform, including the granting of a tax amnesty.