Aiming at Tax Ratio Targets Ahead of Government Transition

The tax ratio is targeted to reach 11.2 - 12 percent of GDP in the first year of Prabowo Gibran's administration.

KOMPAS/RIZA FATHONI

Officers accompanied taxpayers in completing the reporting data for the Personal Income Tax Annual Return for the year 2023 at Mal Kota Kasablanka, South Jakarta, on Sunday (31/3/2024).

The new government era plans to increase the tax revenue ratio in an accelerated manner. During the first year of the Prabowo-Gibran administration, the tax ratio was targeted to reach 11.2 percent to 12 percent of GDP by 2025. Therefore, a number of breakthroughs were needed so that the tax ratio did not stagnate .

One of the campaign promises of the Prabowo Subianto-Gibran Rakabuming Raka couple, who will rule this country in October, is to increase the tax ratio (tax ratio). It is targeted that in the next five years the tax ratio will increase to 23 percent of gross domestic product (GDP). Apart from seeming ambitious, this target is also quite crucial because the tax ratio reflects a country's fiscal capacity.

In fact, the tax ratio is the main indicator in assessing the government's success in collecting tax revenues. The value is calculated as a percentage of tax revenue to the scale of the economy as measured by GDP.

In other words, the tax ratio reflects how much of the national income goes into the tax revenue coffers. Each one percent increase in the tax ratio indicates that one percent of the community's income goes into the state treasury.

The higher the tax ratio, the greater a country's ability to provide public goods and services without relying on debt. This means that an increase in the tax ratio should be pursued to achieve sustainable economic growth.

Also read: Pursuing Tax Ratios in the Midst of Structural Transformation

As an international benchmark, the World Bank sets a minimum threshold for tax ratios at 15 percent. This recommendation is supported by empirical findings that show that over a decade, countries with tax ratios above 15 percent can enjoy a per capita income 7.5 percent higher than the set target.

However, the fact is that since 2000, the national tax ratio has continued to fluctuate around 10 percent, peaking at 12.5 percent in 2008. After that, it never exceeded that number and tended to decrease, reaching 8.3 percent in 2020. Finally, last year, the tax ratio recorded 10.21 percent.

Among the Asia Pacific countries, Indonesia's tax ratio is still relatively low. This is in contrast to the achievements of other countries in the region, which according to the report by the Organization for Economic Cooperation and Development (OECD) show an increase.

In a report titled "Revenue Statistics in Asia and the Pacific 2023," the OECD stated that Indonesia's tax ratio in 2021 ranked fifth from the bottom in the Asia Pacific region. In that year, Indonesia's tax ratio calculated by the OECD reached 10.9 percent, which is slightly higher than the 10.1 percent achieved in 2020.

Also read: "Putting Your Brain On" to Boost Taxes, Prabowo Targets the Underground Economy

In the report, Indonesia is only able to surpass Bhutan, Pakistan, and Laos in terms of successful fiscal tax collection. Although it is superior to some of those countries, Indonesia's tax ratio is still much lower than the Asia-Pacific average which reached 19.8 percent in 2021.

The ASEAN country with the highest tax ratio in 2021 is Vietnam, with a rate reaching 22.7 percent. Next is the Philippines at 17.8 percent, Thailand at 16.5 percent, Singapore at 12.8 percent, and Malaysia at 11.4 percent. Other Pacific region countries such as Vanuatu have a tax ratio of 14.2 percent, Samoa at 25 percent, and Maldives at 19.1 percent.

Challenge

Looking at the current condition of Indonesia's taxation system, it seems that there are still a number of big challenges to increasing the tax ratio. One of them is because there is still low tax buoyancy or the taxation scheme which functions to measure the elasticity between tax revenue and GDP. Historically, the average level of tax buoyancy in Indonesia has been in the range of 0.8. This means that for every 1 percent of national economic growth, tax revenues only increase by 0.8 percent.

The next challenge is the high shadow economy and economic informality which the tax system has not been able to fully capture. The shadow economy is an underground economy that is not detected by the government, thereby disrupting economic growth or GDP performance.

One of the underground economies comes from illegal economic activities that have a negative impact on society. For example, gambling, prostitution, as well as other illegal production such as illegal cigarettes and illegal mining products.

Based on data from the Central Statistics Agency (BPS) in 2021, shadow economy activity in Indonesia is estimated to reach 8.3-10 percent of national GDP. Meanwhile, the Financial Transaction Reports and Analysis Center (PPATK) estimate is even higher, namely 30-40 percent of total national GDP.

In addition, the high level of informality in Indonesia's economy also contributes to the movement of shadow economy that cannot be taxed. Informality arises due to the economy's inability to create formal job opportunities. As of February 2023, informal workers in Indonesia have reached 60 percent of the total workforce.

Also read: Reconsidering Plans to Increase VAT to 12 Percent

Another issue is the suboptimal tax revenue base. Based on data from the National Labor Force Survey (Sakernas) and the Directorate General of Taxes, the majority of Indonesians still have an income below the non-taxable income threshold (PTKP). Ideally, personal income tax should be the largest contributor to tax revenue. Therefore, high income tax revenue (PPh) is one of the keys to increasing the tax ratio.

The next challenge is the taxation system in Indonesia which, in general, is still plagued by various issues. These include a large revenue gap, relatively low tax compliance, as well as the need to evaluate the effectiveness of tax spending.

Steps to increase the tax ratio

Amidst various challenges, the government through the Ministry of National Development Planning/National Development Planning Agency (Bappenas) has targeted a tax-to-GDP ratio of 11.2 percent to 12 percent by 2025. Bappenas has set the Macro Economic Framework (KEM) for the first year of the Prabowo administration, including the tax ratio.

There are at least a number of steps that will be implemented to achieve a higher tax to GDP ratio. One of them is by improving tax institutions through the formation of the State Revenue Agency (BPN) to increase the tax ratio. This means that tax and customs matters will be separated from the Ministry of Finance.

In the future, the BPN will be responsible for managing the state's revenue from taxes, customs, and non-tax sources through an integrated mechanism. In addition, this agency will also focus on activities in the economy that have so far taken place in "dark spaces".

Also read: Taxes for Carbon Pollution Need to be Implemented Immediately

The next step is to accelerate the implementation of the core tax system by optimizing risk-based data management and data interoperability as well as encouraging the tax system to be more compatible with the economic structure.

In addition, efforts are being made to strengthen tax extensification activities and supervision of High Wealth Individual Taxpayers. The optimization of digital forensics is also continuously being improved for the sake of fair law enforcement and the disclosure of wrongdoing.

Finally, the sharpening of tax incentives is on target to encourage priority sectors such as agriculture, manufacturing, tourism, and micro, small, and medium-sized enterprises (MSMEs).

Furthermore, efforts to increase Non-Tax State Revenues (PNBP) are also being carried out through reforming the management of Natural Resources (SDA) PNBP, optimizing dividends of State-Owned Enterprises (BUMN), making more use of continued State Property (BMN) assets, to the implementation of service innovation.

On the one hand, various efforts to increase the target tax ratio can be a good intention to be able to be independent in financing the budget. However, on the other hand, concrete steps are also needed in the form of progressive breakthroughs to increase the tax ratio. Ideally, state revenues should continue to be driven to increase even higher, without having to impose a heavier burden on society and the business sector. (R&D COMPAS)