If in the short term the implementation of VAT on basic goods cannot be carried out, it is very possible that the fiscal deficit cannot be returned to below 3 percent in 2023 as mandated by law.
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There are only two certainties in life: death and taxes. Paying taxes is destiny. Therefore, the tax policy can become the most complicated, dilemmatic and sometimes, controversial economic issue. That\'s what has happened in the debate surrounding the plan to impose Value Added Tax (VAT) on basic goods, such as rice and sugar—called the “Sembako Tax”—as well as key services, such as education and health.
The government has submitted the draft on the revision of Law on General Provisions and Tax Procedures (KUP Bill ) as the fifth amendment to Law Number 6 of 1983, which is included in the 2021 National Legislation Program (Prolegnas). The proposed revision has not been officially discussed, but has been widely circulated in the public.
As explained in the considerations in the draft, the change in the VAT is needed in order to support economic recovery through a fiscal consolidation strategy with a focus on reducing the budget deficit and increasing the tax ratio. The increase in tax revenue is designed through a system that prioritizes the principles of justice and equality, in addition to the improvement in tax administration and compliance. Apparently, the change will be made to support the implementation of the Law No. 2/2020 which regulates the fiscal deficit to return below 3 percent in 2023.
The controversy over the imposition of VAT on basic needs should be seen in its full context. First, taxes are the main source of funding for government spending. The greater the government spending, the greater the pressure on tax revenues. That is why the group of developed countries (G-7) has announced a global corporate tax increase of at least 15 percent once the economy recovers from the pandemic.
Second, why did our government choose an increase in VAT instead of Income Tax (PPh), like the G-7 groups. An increase in income tax, both for personal and corporate , will have an impact on reducing the proportion of savings and investment which in turn will reduce economic growth.
In developed countries, the key to economic recovery is fiscal policy, including corporate sector subsidies. Once the situation improves, companies must pay back the subsidies they have received. In developing countries, such as Indonesia, the role of fiscal stimulus (for corporations) is relatively small and recovery remains dependent on the private sector.
VAT will indeed reduce real wages which may cause a decline in the household consumption. However, the impact on the economy will be neutral because it does not reduce the level of savings and investment. The economies of developing countries, such as Indonesia, still need to accelerate growth through investment financed by savings. It is true that our economy is dominated by household spending so that the implementation of VAT has the potential to lower consumption. That is why, the VAT should have a multi tariff, not evenly distributed across all types of goods. The basic necessities consumed by the upper-middle income people must be subject to a higher rate, while those consumed by the lower-income group have a lower tax rate.
Third, in addition to financing government spending, taxes also function as an instrument of equity and solution to social problems. A recession due to the pandemic will have long-lasting effects on certain sectors and groups of people. The government still needs to provide stimulus for them. On the other hand, the government also needs to ensure greater tax revenues, especially from the affluent groups, without compromising the economic recovery. The principle of fairness in this multi-tariff approach may be forgotten in the public discussion.
It must be admitted, the government does not have many choices in its efforts in increasing state revenues in an uncertain situation due to the current pandemic. The two main components of state revenue are PPh and VAT. In 2020, the ratio of tax revenue to the national economy (tax ratio) is only 8.3 percent. Since 2017, our tax ratio has been below 10 percent, lower than the average of 14 percent in countries in the Southeast Asia region.
The provision of the fiscal stimulus during the pandemic has caused the 2020 state budget deficit to swell to Rp 956.3 trillion or 6.09 percent of gross domestic product (GDP). Tax revenues fell, while government spending increased. In 2021, the budget revenues have not showed an improvement because the nominal deficit will continue to increase by about Rp 1 quadrillion, mainly to support the free vaccination program. Since the economy is projected to grow in the range of 4-5 percent, the deficit is estimated to fall to 5.7 percent.
In the presentation of macroeconomic policies and the main points of fiscal policy in 2022, the government unveils a budget deficit target of 4.51 percent-4.85 percent or equivalent to Rp 807 trillion-Rp. 881.3 trillion. The fiscal management in the 2022 state budget is very important, especially in terms of deficit, because in 2023 the deficit should be reduced back to below 3 percent. The government targets the budget deficit will fall to 2.7 percent in 2023.
How to achieve it? In addition to reducing subsidies, the government must also increase tax revenues. In this context, the KUP Bill has been designed as a way out of the problem. Once the economy starts to recover, the main challenge around the world will be the reduction of stimulus (fiscal and monetary). If it\'s too soon, it will affect the recovery. However, if it is too long, it will pose a long-term (fiscal) risk.
In principle, the stimulus must be timely, temporary, and well directed. This is the dilemma. On the one hand, the government is obliged to design a stimulus withdrawal scenario accompanied by a strategy to increase tax revenues.
On the other hand, public objection must still be considered. First, if the government goes ahead with multi-tariff increase plan, there is no guarantee that there will be no increase in prices for all groups of goods. Second, the scenario of reducing the budget deficit of below 3 percent in 2023 is not yet realistic so that the implementation of the VAT on basic needs has yet to find momentum.
The choice is quite clear; If in the short term the implementation of VAT on basic goods cannot be carried out, it is very possible that the fiscal deficit cannot be returned to below 3 percent in 2023 as mandated by law. For this reason, it is necessary to amend or issue government regulations in lieu of laws.
Even so, tax reforms to increase the tax ratio are still needed in the medium term. Like death, taxes are an unavoidable and unpleasant reality.
A Prasetyantoko, Rector of Atma Jaya Catholic University of Indonesia.
This article was translated by Hendarsyah Tarmizi.