Direction of Tax Policy
In the midst of great expectations for tax collection, there appears to be confusion in the direction of the tax policy.
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Last month, the administration of President Joko “Jokowi” Widodo turned 3 years old. His leadership during the period was marked with a paradigm shift in fiscal policy, transitioning from expenditures to revenues.
If, in the past, we were always struggling to keep subsidies from rising, now the challenge is our ability to raise sufficient state revenues to finance development. In the midst of great expectations for tax collection following the tax amnesty, there appears to be confusion in the direction of the tax policy. Then, what has the Jokowi government achieved, what are its challenges and the work that remains?
Fiscal paradigm shift
President Jokowi\'s leadership marks a new phase in Indonesia\'s fiscal policy. Although the state revenue is a continuum that does not allow for a radical break, the courage to change the policy direction deserves appreciation.
Removing fuel subsidies when global oil prices fell to its lowest, and reallocating spending to more productive sectors, especially infrastructure projects, are two important breakthroughs.
Infrastructure development is needed in order to improve connectivity and create an efficient and productive economy. Unfortunately, this reversal in development orientation is not supported by sustainable income sources. The tax amnesty has failed to attract the repatriation of funds from abroad, and efforts to increase tax collection as the main source of development financing are still ineffective.
Three years under President Jokowi, the government’s achievements in raising tax revenues have not been very encouraging. Of course this should be viewed objectively as regards significant growth in the tax target and reliance on commodity prices.
Although the high increase in the target is understandable because the tax gap is still very wide, leveraging revenues drastically amid the slowdown in the global and domestic economies is no easy thing.
The need to provide incentives and stimulus to drive the economy and to raise household purchasing power could instead result in an economic slowdown. This is due to limited short-term options other than intensification, which in turn can create new unfairness. Thus, providing the prerequisites that allow tax authorities to collect taxes effectively and fairly is an absolute necessity.
President Jokowi\'s decision to implement the tax amnesty became an important turning point. It brought a breath of fresh air that gave respite to the national economy. The most widely appreciated program, which was considered the most successful one, raised at least Rp 4.865 quadrillion in declared assets and Rp 135 trillion in ransom money.
Unfortunately, no more than one million taxpayers joined this program and only Rp 147 trillion of funds repatriated successfully. The tax amnesty was able to foster important social capital, growing the spirit of mutual cooperation and trust between the government and taxpayers. Unfortunately, this tax honeymoon did not last long.
The government’s tax efforts after the tax amnesty program are still uncertain, so those who joined the program do not feel relief, while those who did not join the program do not feel at all guilty. Policies with an appropriate and measurable target that fulfills the sense of public justice need to be formulated well.
Tax reform challenges
There is high expectation in the ongoing tax reform. This long, unfinished and often stumbling project needs to be designed comprehensively (covering the dimensions of policy, regulation and administration together) to create a just and sophisticated taxation system. Some things need to be done. First, instead of merely patching up technical-administrative issues, the tax reform should undertake a radical change in tax policy.
More open mindsets are needed in this fast-changing world. This is reflected in the way it treats tax ecosystems as complex, dynamic, egalitarian spaces of mutual trust. The idiomatic principle of "don’t kill the chicken, but take the eggs" should really be the foundation of thought and work. A concrete example is the need for caution in taxing the digital economy.
Second, policies should focus on building compliance through selecting taxpayers based on the level of risk. The government needs to offer concessions to those who have followed the tax amnesty and are relatively compliant, while at the same time, it should target groups outside the taxation system and those that intentionally avoid paying taxes. Tax audits and other law enforcement instruments should be directed at non-compliance groups to encourage effective and mass tax compliance. For example, serious follow-ups against "the unreachable and untouchables" reported in the Panama Papers and the Paradise Papers can fulfill the public\'s hunger for justice.
Third, there is a need to design incentive schemes and stimuli that will bring a real impact on the national economy, especially on corporate cash flow and public purchasing power. In the short term, accelerating restitutions, changing the rules on compulsory Value Added Tax (VAT) collection for state-owned enterprises, reducing tax installments, fair and objective tax investigations, transparent tax dispute resolutions, modifying non-taxable incomes (PTKP) by expanding allowances for households, extending temporary VAT exemptions on public goods, as well as improving tariff structure and tax administration for SMEs and professionals.
Fourth, there is a need to review overlapping policies and rules that create uncertainty and constraints, such as the overzealous tax administration. Tax authorities need to sit down with stakeholders to ensure that the complicated tax rules carry more certainty and are more effectively implemented. This includes building a system of accountability and integrity in implementing an automatic financial information exchange policy.
Fifth, there is a need to simplify tax administration and procedures. Indonesian tax administration is complicated. Simplification is not just about the automation and development of information technology-based systems, but it also includes business processes – registering, paying, reporting and deleting. Simplification is needed for easier implementation.
Sixth, there is a need to improve public communication by focusing more on symbolic actions that are measurable and can bring certainty in direction. The bubbles and maze of policies and actions that can potentially create uncertainties need to be reduced in order to maintain public trust.
Of course, these six points are a quick win to regain public sympathy and to create a conducive situation. Important and medium-term agendas should still be prepared and worked in parallel. Among the revisions of the Tax Law, including the Regional Tax and Retribution Law that still has many loopholes and shortcomings, should also include redesigning the central-local fiscal architecture, implementing a single tax identification number, preparing institutional transformation to an independent tax body, developing an administration system based on advanced information technology, reforming the tax court, and establishing international cooperation in taxation.
The high public trust in President Jokowi and Finance Minister Sri Mulyani Indrawati should be used as a driver to build a credible and accountable tax system. Amid the dedicated efforts to meet the state revenue target, appreciation should be given to the Directorate General of Taxation and the Directorate General of Customs and Excise, which are committed to reform.
Tax leadership
Moderating the tax targets since the 2017 state budget should be followed up to ensure the establishment of a solid foundation. Don’t let the hard work in building a good system go to waste due to public distrust; it takes strong discipline and high commitment from all officials and tax apparatuses.
Tax authorities need to be challenged to prove that they are able to become an independent collection agency. Leaders should ensure effective management, control and guidelines to avoid actions that may potentially undermine trust. There is a need to improve understanding of and sensitivity to the concrete situation of the economy, which needs certainty on the one hand and law enforcement on the other, in order to protect and fulfill the sense of public justice.
President Jokowi and Finance Minister Sri Mulyani need to direct reforms to ensure that they run as expected. Three main functions – harmonization, debottlenecking, and breakthroughs – must run effectively. The job of a conductor is to make sure all players follow guidance to create good music.
Leadership across all lines should refer to a single great vision. The memory of Aristides – the Father of Just Tax – still echoes loudly today: collecting tax fairly is not just corruption-free, but must make all sides happy. In other words, taxation must be an art and endeavor that contributes to the progress of the nation in a happy way. Don’t let Minerva arrive at dusk, because regret is useless.
YUSTINUS PRASTOWO
Executive Director of the Center for Indonesia Taxation Analysis, Jakarta
