The Big Narratives of Taxation in 2017

Kompas/Handining

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The year 2017 was not an easy year for Indonesian taxation. In the first quarter, we completed a tax amnesty that had begun in July 2016.

Following the tax amnesty, the government struggled to fulfill its commitment to comply with the global implementation of the Automatic Exchange of Information (AEOI) by issuing in lieu of law, Perppu No. 1/2017, which was approved by the House of Representatives and passed into Law No. 9/2017. The tax amnesty, which should be followed by law enforcement, left a sense of grief. Various improvement efforts and breakthroughs had been made but they failed to produce satisfactory results.  The easing of tax policies and targets conducted in 2017 were important steps and should be followed by the establishment of a lighter and clearer policy as a guide. Injecting the "political characteristic" of taxes is urgently needed.

Two important milestones

The big taxation narratives of 2017 can be seen from two important milestones: the end of the tax amnesty on March 31, 2017 and the passing of Perppu No 1/2017 on Access to Financial Information for Tax Interest into Law No. 9/2017. The tax amnesty under Law No. 11/2016 served as a basis for reconciliation - both taxation data and relations between countries and citizens - and a bridge to a new era of the transparency of the taxation system. The Perppu, in addition to being Indonesia\'s commitment to global initiatives, has also become an instrument to strengthen law enforcement and compliance post-tax amnesty. The main problem of our tax system is a lack of accurate data, which is quite important to effectively collect taxes. The tax system works in the logic of "who owns what".

The end of the tax amnesty and approval of Perppu No. 1/2017 have in fact led to some confusion. The implementation of the law that could have been immediately enforced as a consequence of the Tax Amnesty Law was postponed. The government only issued Government Regulation No 36/2017 as the implementation of the Tax Amnesty Law in mid September 2017.

These were influenced by three factors. First, although the tax amnesty was able to collect  Rp 4.8 quadrillion in asset declarations, the participants of the program were very few, only 965,000 taxpayers (WP). The lack of the participants in the tax amnesty indicates there would a large number of taxpayers who would become the target of law enforcement. Second, the penalties under the Tax Amnesty Law are too severe and unfair because they are instead targeting the tax payers who have followed the amnesty. Third, as the condition of the national economy, which is generally stagnant despite showing improvement, the law enforcement can be counterproductive in the effort to boost economic growth.

Finally, Finance Ministerial Decree No. 165/PMK.03/2017 provides clarity and certainty. Instead of imposing strict and tough law enforcement, the government chose to give the taxpayers the opportunity to voluntarily disclose assets by paying the taxes according to the requirement. The public often calls this as "second stage of tax amnesty" though it was not exactly true. The issuance of the finance minister’s decree should be appreciated so that the process of tax reform, including the moderation of law enforcement, regulatory improvement, service improvement, and improvement of administrative system, can be completed. The most crucial thing is the completion of the core tax system project as the modernization of the administrative system to make tax collection more effective, fairer and easier for the tax payers.

In the area of customs and excise, reform has been launched. Beginning with the integration between customs identity number and taxpayer identity number (NPWP) for ease of administration, the Directorate General of Taxation and the Directorate General of Customs and Excise forged cooperation in law enforcement, among others by joint analysis and joint audit.

This program was quite successful in increasing state revenues from  Value Added Tax (VAT) by up to 25 percent.

The government also facilitated the development of the Bonded Logistics Center to improve its competitiveness in logistics. It was then followed with the tough measures against  high-risk importers (PIBT) who have caused a great loss to state revenues and violate the provisions of trade system. Coinciding with this, the Economic Coordinating Ministry  has reduced the number of goods being prohibited and restricted (Lartas) from 49 percent to 19 percent. Finally, the roadmap on the easing of the excise policy and certainty as stated in Finance Ministerial Decree PMK No. 146 / PMK.10 / 2017 should be appreciated.

Reduce confusion

The implementation of the taxation throughout 2017 also marked some confusion that sometimes disturbed and deflected the focus. Just to mention a few things, first, the polemic regarding the requirement to report taxpayers\' assets, such as smartphones in the annual tax return has raised the perception that the government is chasing taxes from the middle class. Second, the Finance Minister’s Decree No. 70/PMK.03/2017, which sets the threshold of bank account balances of Rp 200 million that has to be reported. This provision was again perceived the government to target the middle class. The threshold was then increased to Rp 1 billion through Finance Ministerial Decree No. 73/PMK.03/2017.

Third, the controversy over the value of exemption of import duty (de minimis value) on goods brought by travelers from other countries of US$250 per person and $1,000 per family was too low. Although this rule has been implemented for a long time, the government was still criticized for being too aggressive on taxpayers. Finally, the government through PMK No. 203/PMK.04/2017 dated Dec. 27,  2017 raised the limit to $500 per person and simplified procedures.

Fourth, regarding the tough policy against  high-risk importers, while important and bold, in practice, it causes problems, especially for small and medium industries due to barriers to imports. Finally, the government simplified the procedures and guarantees the small and medium scale industries will receive the required facilities. Fifth, policies were implemented without passing through adequate deliberation. Although the goal is good, it creates technical problems, not only because it is complicated but it also often overlaps with the authority of other institutions. As the consequence, it raises the cost of compliance (the administrative burden that must be paid by the taxpayer to carry out their tax obligations). This is for example reflected in the regulation of the Directorate General of Taxation PER-18/PJ/2017 and PER-26/PJ/2017.

The most controversial thing and should be dealt with is the practice of collecting taxes that are not fully based on fairness. There is still a strong impression that participants of the tax amnesty have become the target of tax audit. The promise of forgiveness and relief has not been fulfilled. Even though it is the authority of the Directorate General of Taxation, risk-based checks should be carried out on non-compliant groups of taxpayers, especially those who are "unregistered and not paying taxes".

Considering the prospect

The government has strong momentum and political backing to complete the tax reform. The support from the public in the form of the growing trust between the government and taxpayers  should be appreciated and utilized properly. The tax policy issued by the government often misunderstood the public because of wrong perception. This mistake shows the great challenge in improving the tax literacy. In order not to be counterproductive to the tax reform and economic recovery program, it is necessary to ensure that the effectiveness of the authority execution depends on legitimacy. And, legitimacy rests and relies on the public\'s trust in taxation institutions.

The government should therefore avoid issuing a  policy which cause confusion which can discourage the people pay their taxes. Politically, the confusion and criticism against the tax  policy  has the potential to undermine political support for President Joko Widodo. We need to go back to the main road map and the long-term goal in taxation, which are among others to ensure a fair and lawful taxation system, to make taxes as effective instrument in retribution of wealth, to build a powerful administrative system, reliable resources and integrity and simple and effective procedures.

Some of the measures can be carried out in 2018.  First, establishing more comprehensive indicators so that tax targets are more realistic and provide room for the completion of economic reforms and recovery agenda. In addition to the tax ratio, it is also important to measure the impact of tax policies on reducing inequality, the number of poor people, and national productivity. Second, tax policies should be responsive to economic, social and political dynamics. The trial ground is for example on the issuance of the policy towards online transactions (e-commerce) which is now being drafted. Third, focus on incentives and stimulus that have a significant impact on industry and the people\'s purchasing power. Unnecessary measures should be avoided.

Fourth, establish accountability system for the exchange of financial information to ensure the privacy and security of the data of the taxpayers, including the procedure on the utilization of the data. Fifth, the easing of  law enforcement by allowing taxpayers to perform voluntary disclosure but conduct an audit of non-compliant and high-risk taxpayers.  State-owned enterprises that carry out public mission should be supported and be given facilities, not just being milked. Sixth, improvement of information technology-based administration and simplification that provides convenience, certainty, and cost-efficiency for taxpayers. Seventh, continuing reform in the field of customs with the support of all stakeholders, especially in the reduction of  restricted goods and the facilitation of consolidated imports, so that ease of import and logistics reform have a major impact on the national economy.

Taxation is a pillar of a democratic country because it provides an independent source of finance for development and as an effective means of power control. Thus, deliberation through citizen involvement - including through parliament - in the process of policy formulation and its implementation becomes a necessity. The task of the government is to guarantee a fair tax collection, by ensuring that obedient and honest taxpayers get an appreciation while give a punishment to recalcitrant taxpayers as well as educate who don’t understand. It is not only about creating tax technicality, the tax policy should be able to bring prosperous and just society in Indonesia in the future.

Preparing a taxation road map as a guide for the implementation of future policy: democratic government and citizens with characteristics  as good taxpayers. The government once initiated public discourse on the idea of imposing land hoarding tax as a redistribution instrument. Unfortunately, this idea has fizzled. Now is the time to reduce the desire to organize, and should instead expand the sitting space to talk.

Yustinus Prastowo

Executive Director of the Jakarta Center for Indonesia Taxation Analysis