T

he latest World Bank report on Indonesia warns of the rising risk of social tension and conflict as inequalities of income and asset ownership widen, recommending a more vigorous collection of personal income tax to broaden the taxpayer base.

The 2014 World Bank survey of the public perception of inequality in Indonesia shows that most respondents consider income distribution in the country to be very unequal or not equal at all.

More than 60 percent also said they were willing to accept slower economic growth in exchange for reduced inequality.

The World Bank, which announced the results of the survey on Tuesday, said Indonesia had experienced sustained economic growth in the last 15 years but this had mainly benefited the richest 20 percent but had left behind the remaining 80 percent of the 250 million people.

No wonder, Indonesia'€™s level of inequality is now considered to be relatively high and climbing faster than most of its East Asian neighbors, as shown by its Gini coefficient, which increased from 30 percent in 2000 to 41 percent in 2013, but down to around 40 percent this year.

The World Bank cited a narrow base of individual income taxpayers as one of the main drivers of inequality, pointing out that collecting more personal income tax, which at present accounts for only around 10 percent of total tax receipts, would bridge the wide income divide.

Besides weak tax collection, the structure of the individual income tax system is also lopsided in favor of the upper middle income and wealthiest taxpayers as the highest rate (30 percent) is applied to an annual income of Rp 500 million (US$35,500) and more, while many corporate executives, including those in state companies, may earn between Rp 2 billion and Rp 5 billion.

Those with large financial assets can even net personal incomes to the tune of tens of billions but those who earn Rp 250 million are already subject to the 25 percent tax rate.

The House of Representatives and the banks association have steadfastly opposed the demands by the Taxation Directorate General (DGT) for access to bank accounts, arguing that this would breach the Banking Secrecy Law.

The government again enacted a regulation early this year that would allow tax officials to verify personal income tax due on financial assets (accounts at banks) but quietly canceled the rule for fear that rich depositors might move their financial assets to banks overseas.

We regard as weak the claims about breaching the Banking Secrecy Law and scaring rich depositors into moving their financial assets overseas because bank customers are already required by law to file their individual tax returns annually, which also stipulate in detail all their fixed and financial assets, including deposits and savings, securities, etc.

Furthermore, many countries around the world have eased their banking secrecy rules in a concerted effort to crack down on tax evasion and money laundering.