T

he latest World Bank quarterly report on Indonesia'€™s economy estimates that 50 percent of tax potential in the country remains untapped, causing the tax ratio '€” tax receipts as a percentage of gross domestic product (GDP) '€” to be very low at only 12 percent, among the lowest in the region.

Former tax director general Fuad Rahmany acknowledged recently that about Rp 300 trillion (US$25 billion) in potential income tax revenue was uncollected annually because of the acute shortage of tax auditors to examine institutional and individual taxpayers.

This year'€™s Rp 1,246 trillion tax revenue target is also not likely to be realized because of lower-than-estimated economic growth and substantial tax evasion.

President Joko '€œJokowi'€ Widodo promised in his recent election campaign to increase the tax ratio to 16 percent within the next five years, which is realistic, according to the World Bank report.

There is indeed a lot of room for increasing tax revenue, even though the economy is projected to continue to grow at a moderate rate of 5 to 5.5 percent in the next two years.

But tax evasion is substantial. The tax compliance level is very low, as less than 50 percent of registered taxpayers regularly file their annual tax returns.

Last year, for example, income tax receipts from upper middle and top income individuals amounted only to
Rp 4.4 trillion, while those withheld by companies from their employees reached Rp 90 trillion.

The World Bank cited low rates of accurate reporting across a wide range of taxes, taxpayer segments and sectors, pointing out that 47 percent of coal royalty potential in 2012, or about 0.2 percent of GDP, was not collected because of non-payments and under-payments. This simply confirmed the findings of recent research into the coal industry by the Corruption Eradication Commission (KPK).

True, the number of tax auditors now, as the former tax director general admitted, is only about 30 percent of the actual personnel required. But this is not the only concern, because the tax office has always been perceived as one of the most corrupt public institutions in the country.

The World Bank noted that improvements in tax policy and compliance would be critical to expand the fiscal space for investment. In this context, it suggested that the tax base be broadened by reducing exemptions.

Complicated tax structures must be simplified and tax rates that are particularly low by international standards should be increased.

It is encouraging to note that the World Bank also promoted the idea, which has long been touted by the tax chief, of improving tax auditors'€™ access to third-party data, especially with regard to taxpayers in sectors and segments with high tax potential but low compliance, to match data across databases.

Accessing data on taxpayers'€™ assets ( property, business and financial assets) could greatly help tax officials to better verify tax compliance by cross-checking taxpayers'€™ annual tax returns against their assets.