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Jakarta Post

Tax reform for inclusive growth

  • Editorial Board

    The Jakarta Post

Jakarta   /   Thu, December 6, 2018   /   08:35 am
Tax reform for inclusive growth Lawmakers attend an almost empty plenary session at the House of Representatives in Senayan, Jakarta. (The Jakarta Post/Dhoni Setiawan)

One of the hot issues raised over the past two months of election campaigning is related to the miserably low tax revenues. For more than two decades, government tax receipts reached less than 11 percent of gross domestic product (GDP), far below the 15 percent threshold needed to stimulate inclusive growth. This reflects the blunt fact that the capacity of the current tax system is unacceptably low. Consequently, tax evasion is quite massive and inequality in income and asset ownership continues to increase. 

Whether the tax to GDP ratio is narrowly or broadly defined, Indonesia’s tax performance has remained consistently near the bottom among its ASEAN peers. Hence, the tax system should be overhauled to increase government revenues to support higher expenditures on human resource development (education and health care) and basic infrastructure.

But tax reform is only possible if the legal foundations (tax laws) are revised. But many in the House of Representatives seem to underestimate the magnitude and gravity of the problem. The government proposed to the House a bill on general tax provisions as the first of three tax laws planned to be revised as early as 2016, but the draft law has remained on the shelf.

Now, in the run-up to the presidential and legislative elections in April 2019, it is rather impossible to deliberate such an important, yet politically sensitive, bill because in an election year, everything tends to be examined through the prism of politics.

We, therefore, support the suggestion of many analysts that the deliberations of the bill on general tax provisions be postponed, so that it can be debated at the House together with the bills on income tax and value-added tax after the new government takes over in October 2019.

Deliberating the three bills in a single package will be more effective and efficient to ensure the tax system resulting from the comprehensive reform will greatly improve the efficiency of tax collection, enhance equity in tax burdens and make it easier for the tax office to administer and for taxpayers to comply with the various taxes.

The government should see to it that the tax reform should not be piecemeal and ad hoc in nature but should be able to transform the tax system in a focused, systematic fashion, based on facts and sound economic reasoning. The reform should be seen as part of an overall program to raise the government’s financing capacity and at the same time, reduce inequality and enhance fairness.

Moreover, past experiences have also shown that it is politically much easier to launch such difficult and politically sensitive reforms — a key to Indonesia’s medium-term revenue strategy — at the outset of a newly elected government. 

The stakes are quite big. Without a comprehensive tax reform, the government’s financing capacity will remain inadequate to significantly help lift up economic growth over 5 percent. But higher economic growth is badly needed to create more jobs to absorb the 2.5 million annual addition to the workforce and to lift an estimated 26 million people out of absolute poverty.