Indonesia's low tax-to-GDP ratio
The Jakarta Post
The World Bank, the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) — all of which have released their latest surveys on the Indonesian economy at the ongoing 2018 IMF-World Bank Group Annual Meetings in Nusa Dua, Bali — share their views on Indonesia’s utterly low tax-to-GDP ratio.
The OECD points out in its latest survey that low tax revenues cause low public spending, which undermines the quality of services and exacerbates infrastructure gaps. Indonesia’s tax base is narrow and tax compliance is poor whereas increasing tax revenues is critical to financing investment and social programs.
The IMF concurs, saying that since Indonesia’s tax-to-GDP ratio is less than 11 percent — way below the 15 percent threshold needed to stimulate growth — the country cannot fully harness the potential of its 5.4 percent economic growth. Its tax-to-GDP ratio is also much lower than most other middle-income countries.
The government has attempted tax and administrative reforms but the draft bills that would allow for comprehensive tax reform have stalled at the House of Representatives. The Taxation Directorate General’s latest data shows that less than 66 percent of approximately 16.50 million registered individual taxpayers had filed their 2017 tax returns by the March deadline. And only about 992,000 of the 10.60 million who filed their returns were self-employed, highly paid professionals — high net worth individuals — like doctors, independent consultants, lawyers and businesspeople.
It’s no wonder that personal income taxes contribute a mere 10 percent of tax revenues, with the other 90 percent coming from corporate and indirect taxes. In most other countries, personal income taxes contribute the bulk of revenues.
Yet even more worrisome is that the Center for Indonesia Taxation Analysis has estimated that last year’s tax audit covered only 0.39 percent of 1.9 million registered individual taxpayers, excluding employees whose employers withhold their income tax. This is far below the 3-5 percent the IMF has set as the minimum audit coverage necessary to enhance voluntary tax compliance and to discourage tax evasion.
Our tax authorities should not have to wait for the House to approve the new tax bills to boost tax collection. The tax office virtually has a complete arsenal to hunt down tax evaders — even across the world, as the Automatic Exchange of Information global tax treaty comes into force in Indonesia this year.
Law No. 9/2017 also authorizes tax officials to access the financial records of all taxpayers and another set of government regulations require companies, foundations and trusts to disclose their true beneficial owners.
More than one year since the tax amnesty ended, it is high time for the government to implement a much more vigorous approach to collecting taxes and auditing taxpayers. Catching tax evaders and recovering revenues will not only deter potential evaders and encourage voluntary tax compliance but also restore justice to millions of compliant taxpayers.
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