Intensifying tax audits
The Jakarta Post
The 20 percent increase in this year’s tax revenue target to Rp 1.61 quadrillion (US$115 billion) will unlikely be achieved without more vigorous collection, as even the most optimistic estimate has put Indonesia’s economic growth at only 5.2 percent, 20 basis points (bps) lower than the government target.
The prospects for higher growth were doused after Bank Indonesia raised its policy rate last month by 50 bps to maintain financial market stability, ahead of an anticipated United States Fed rate hike.
Tax revenues did go up by more than 20 percent in the first quarter, but the gain was mostly from corporate taxes, which were in turn generated mainly by improved commodity prices and higher value-added tax receipts on imports. However, commodity prices seem to have peaked and a similar increase in tax revenue from this sector cannot be expected for the rest of the year.
Hence, the most promising alternative route for increasing tax revenues is by intensifying the collection of personal income tax, because all indicators show that the personal income tax potential has never been fully tapped.
The latest data at the Taxation Directorate General shows that less than 66 percent of the estimated 16.5 million registered personal (individual) taxpayers had filed their 2017 tax returns by the March 31 deadline, reflecting a persistently low level of compliance, even after the most generous tax amnesty ended in March 2017.
Yet, more disappointing is that only around 992,000 of the 10.6 million taxpayers that did file their returns were self-employed professionals such as doctors, consultants, lawyers and businesspeople, and the other 9.6 million were paid employees whose employers withheld their income taxes by default.
The data simply reflects the high incidence of tax evasion and confirms the World Bank estimate that the government had collected only half of the tax potential. It’s no wonder that personal income taxes only contribute about 10 percent of total revenues, with the other 90 percent derived from corporate and indirect taxes. In most other countries, personal income taxes contribute the bulk of tax receipts.
The public perception is that highly paid professionals and individuals of high net worth (the richest people) in the country have not paid their income taxes in full, and that this massive and widespread tax evasion has been possible due to the acute lack of tax audits. The Center for Indonesia Taxation Analysis has estimated that last year’s audit coverage ratio (ACR) was a mere 0.39 percent of the 1,964,331 registered personal income taxpayers, excluding those whose employers withheld their income taxes.
This ACR is way below the 3 to 5 percent the International Monetary Fund has set as the minimum coverage ratio to enhance voluntary tax compliance and to discourage tax evasion. Certainly the tax authorities will never have a sufficient number of auditors to examine all taxpayers.
But as tax officials are now authorized to access the financial accounts of all taxpayers, they can better focus their tax audits to target rich individuals.
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