New History of Indonesian Taxation
After a very dynamic journey, we have reached a milestone in the history of Indonesian taxation. Once again, we have proven our ability to take advantage of a period of crisis by turning challenges into hope.
The House of Representatives (DPR) plenary meeting on 7 Oct. 2021 approved the Draft Law on Harmonization of Tax Regulations (RUU HPP) to be passed into law.
After a very dynamic journey as well as public discourse, we have reached a milestone in the history of Indonesian taxation. Once again, we have proven our ability to take advantage of a period of crisis by turning challenges into hope.
So, what are the new items and the blueprint of the tax ecosystem that need understanding?
Our memory about taxes is not too difficult to trace. Just mention one of the most controversial issues, the government’s plan to tax basic necessities, education and health services, gives truth to Richard Eccleston's statement that taxes are a “necessary evil”. Taxes are rejected as much as possible because they are burdensome, but they must exist precisely in order to live sustainably.
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This paradox has carried over since the idea emerged to revise the Law on General Provisions and Procedures for Taxation (UU KUP). Change for improvement and betterment is often bitter and unpleasant. However, the legislature’s approval of the RUU HPP after going through a deliberation process and intensive discussion revealed important facts.
The striking of the gavel (or the House agreement) was an expression of a fair scale: strengthening tax authorities for a secure future without compromising on the importance of supporting business ecosystems and a sound economic recovery.
New milestone
It is no exaggeration to call the passing of the RUU HPP a new milestone in tax reform. Against the backdrop of the pandemic, when many parties are concerned about the declining trend in Indonesia's tax ratio, consistently missing tax targets over the last 12 years and a tax policy oriented more as an incentive to sustain the lives of business actors, we have actually been able to think clearly about the importance of building and designing the foundation for a solid tax system, starting now.
The RUU HPP combines the principles of gotong royong (mutual assistance), equality, fairness, convenience and simplicity, short-term needs with the importance of a long-term vision, as well as commitment to the common good. Therefore, this bill has an omnibus character in that it makes sweeping changes to several tax laws and wide-ranging issues at once, from administrative matters to improving governance, strengthening authoriy to adjusting substance in accordance with the dynamics of business, and to making efforts to maintain a healthy and sustainable environment.
Several important points in the RUU HPP deserves noting. First is the affirmation of the tax principle of “the wealthy pay more”, while on the other hand, the poor will be helped. So this bill maintains the non-taxable income (PTKP) of Rp 4.5 million a month or Rp 54 million a year for individual taxpayers (WP OP). Not only that, stronger support is provided by widening the bottom threshold of taxable income from Rp 50 million to Rp 60 million. This has the effect of reducing the tax burden for low-income taxpayers.
Not only that, turnovers up to Rp 500 million is not taxed for micro, small and medium enterprise (MSME) individual taxpayers, or WP OP UMKM. On the other hand, super-rich taxpayers with taxable incomes above Rp 5 billion are subject to a higher tax rate of 35 percent.
Second is that value added tax (VAT) has been reformed to make it fairer.
The current international VAT system has a cancer called exception, according to tax expert Maurice Laure. Exempting too many goods, services, transactions and sectors causes tax distortion and fails to create justice and effective oversight. So the delivery of goods and services is basically a VAT object without being a VAT subject.
A VAT scheme has been prepared to exempt the delivery of the basic necessities the people need, integrates health services with the National Health Insurance system, while educational and social services continue to support the lower-middle income population. Although the VAT rate will be adjusted to 11 percent on 1 April 2022 and then to 12 percent by 1 Jan. 2025, our VAT rate is still below the global average of 15.4 percent, the OECD’s 19 percent, and BRICS’ 17 percent. On the other hand, assistance and subsidies for social protection continue to be strengthened.
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Third is moderation of tax administration and rational sanctions. In line with the spirit of the Job Creation Law, the government has provided consistent relaxation and various facilities without neglecting the importance of good governance.
The Population Identification Number (NIK) and the Individual Taxpayer Identification Number (NPWP) have been integrated for convenience and simplicity.
A risk-based policy approach is fairer and more effective in mapping taxpayer behavior by strengthening the authority of tax officials to enforce the law measurably and accountably, along with moderating tax sanctions – both administrative and criminal – as an instrument to encourage compliance and civic virtue, not as punishment that excludes taxpayers from the tax system. This is confirmed in the stronger acknowledgment of the power of taxpayers to take on an intermediary role in a professional and accountable manner.
The above lays out the context for the fourth point, namely the Voluntary Disclosure Program that is often identified with tax amnesty. The two are certainly related, although they must be clearly distinguished. Tax authorities currently have access to databases that are better qualified than in 2016.
Tools to enforce the law are also available so that the existing information/data is followed up properly. We understand that the design of the 2016 tax amnesty with ransom fees of 2 percent, 3 percent and 5 percent created an obstacle, namely a 200 percent penalty to absolve participating taxpayers who failed to disclose their assets.
To facilitate those who genuinely want to be honest and open, the government offers to abolish sanctions, provided that the taxpayer pays a higher rate of taxes than the amnesty, namely at 6 percent, 8 percent and 11 percent. All taxpayers who want to comply, including those as yet unregistered, are given the opportunity to voluntarily disclose untaxed assets for the 2016-2020 period and relaxed rates of 12 percent, 14 percent and 18 percent, in considering the economic capacity of taxpayers who are less able to pay taxes because they were severely affected by the pandemic.
It is clear that this program is not a tax amnesty because its design, rates and objectives are different. The Voluntary Disclosure Program is a gateway and bridge to a fair, healthy, effective and accountable taxation ecosystem that is underpinned by a high level of voluntary compliance, as well as credible and effective instruments for monitoring and enforcement. To put it plainly, there is no room for a deviant mentality that will be kicked out of the system.
It is clear that this program is not a tax amnesty because its design, rates and objectives are different.
Imagining the future
Lastly, the RUU HPP is visionary in the carbon tax that anticipates the impacts of climate change. This affirmative policy demonstrates Indonesia's strong commitment to reducing carbon emissions towards a cleaner, healthier and more sustainable future. Instead of being a new levy, the carbon tax is an instrument and catalyst to ensure that the emissions reduction roadmap is a joint commitment between the government and business actors. The idea of the carbon tax allows the government to accelerate the realization of a holistic and comprehensive environmental and energy policy.
Of course, the law is not entirely perfect. Several things still remain unresolved and are on the agenda of the semper reformanda, the ongoing reform agenda. Regardless, the approval of the RUU HPP through inclusive and participatory discourse has made taxation an estuary of various interests which, if managed properly, can be an instrument for effective economic, social, political and cultural transformation.
Aspirations about favoring the marginalized, making efforts to overcome inequality, and affirming more just and equitable redistribution and social construction that lead to the vision of Indonesia 2045 have become increasingly clear. Consensus on the tax policy reflects the ability of stakeholders to go beyond certain interests to ensure that we advance towards a more civilized Indonesia.
Yustinus Prastowo
Not having the mentality of being “unwilling to apply for debt and refusing to pay taxes”, but also being faithful to the eternal call for taxation, the ideals of a just, prosperous and civilized society are very likely to be embraced through taxes. We have made a bold move. Let's conclude this project with determination, including the optimism to take on the G20 presidency in 2022 with new policies as capital and the ability to manage crises, armed with stronger mutual cooperation.
Yustinus Prastowo. Special Staff to the President for Strategic Communication
This article was translated by Kurniawan Siswoko.
