T

he article titled '€œStructural woes spell tax office trouble'€ (The Jakarta Post, Sept. 16) has unveiled an issue far bigger than first thought. The Indonesian tax to gross domestic product (GDP) ratio is low, about 13 percent, compared to 15-17 percent in other Asian countries, due to inadequate and inefficient tax collection. Why is this so?

The failure to establish an effective tax system to generate government revenue would drag any country into a huge budget deficit issue. If Indonesia faces a big fiscal deficit, it will be a very alarming situation because it'€™s economy is still fragile. Although the Indonesian economy maintains its high growth, the main locomotive of that growth is domestic consumption, which is unsustainable in the long run.

To tackle the fiscal deficit issue, the government has implemented significant fiscal reforms since 2002. To boost tax revenue, the tax directorate general has delivered solid reform in different areas of organization. However, we must admit that the reform is inadequate.

Among several tax reform issues, the organizational issue is one of the most important. To give an overview of where Indonesia'€™s organizational tax reform is and where it is heading, let us see the trend of tax reform that has been undertaken by other countries.

Steven Gill (2003) indicates there are seven trends of organizational tax reform. They are: upgrading the placement of the tax office within the overall government structure, combining tax and customs offices, assigning the responsibility for collecting social security contributions to the tax office, introducing a functional organizational structure within the tax office, creating data processing centers (DPCs), establishing large tax payer units (LTUs) and establishing a tax administration organization.

Only six trends are relevant to Indonesia and from the seven trends, Indonesia has only incorporated three agendas: our tax office already has both DPCs and LTUs and the office has also introduced a functional organizational structure. We still have three more important organizational reform agendas to undergo if we want to reach the best practice of tax reform.

Unfortunately, these three agendas are the most difficult since they require political will and strong coordination among stakeholders, both things that Indonesia lacks.

The placement of a revenue administration within the government structure is really important. It has a significant implication for tax office'€™s ability to gain political support to push for required legislative changes, implement reforms and take strong enforcement actions against vested interests. It also influences its autonomy in using financial resources, hiring and firing staff and taking day-to-day operational decisions.

There are several types of placement of tax office within the overall governmental structure. However, most tax offices such as those in Japan, South Korea, Australia, Norway, Denmark, Spain and Iceland, are unified semi-autonomous bodies that are responsible to the head of government. The NTRC Tax Research Journal (2004) noted the trend toward this model was taking place in Latin America and in Asia, in particularly in Singapore and Malaysia.

Another type is the revenue authority model, which has tremendous autonomy since it is a separate organization from the government.

The last one is a model that places tax offices under finance ministries, which is what has been applied in Indonesia.

The tax office in Indonesia is placed at echelon level I within the Finance Ministry. A low position within a governmental structure always means low autonomy, less flexibility and minimum support.

The office here does not have the authority to manage its own budget and staff recruitment. All the systems within the office follow rigid, bulky government bureaucracy.

A lack of support can be clearly seen from the budget given to the tax office. If we compare the administration cost to revenue ratio (ACRR), it decreased from 0.64 percent in 2008 to 0.58 percent in 2009. Compare that to the average ACRR in 50 other countries within the same period, which have tended to increase. Malaysia, for instance, almost doubled its ACRR ratio from 1.04 percent in 2008 to 1.41 percent in 2009, twice as much as Indonesia'€™s ACRR.

The low cost of collection on the one hand indicates efficiency, but on the other it shows the tax office does not have enough resources to deliver sufficient services and collect the proper amount of tax from the economy.

These circumstances have contributed to the increasing trend of tax revenue shortfall and to some extent, if it comes to the delivery of a bad service, the damaging of the investment climate.

In the last five years, the revenue target has tripled but the number of tax officials (fiscus) remains the same. Indonesia'€™s ratio of fiscus to total population is 1:7,000, compared to Japan with 1:1,000.

Another important organizational reform agenda item to reach is the unification of the tax and customs offices, while assigning the responsibility for collecting social security contributions to the tax office. By doing this, the tax office will have a more solid database from which to fight tax evasion and tax avoidance.

Given the complexity of issues faced by the tax office, adopting organizational reform is not a panacea but must go hand in hand with other non-organizational reform agendas such as management strengthening; operational reform, which includes strengthening legal and regulatory frameworks; and many other important issues.

Organizational tax reform is the key to effective reform but without it, all reforms taken by the tax office will not bring enough benefits.

The writer is an alumnus of Waseda Graduate School of Asia Pacific Studies in Tokyo.