Discourse: Sri Mulyani all about fair growth, reforms
Jakarta / Thu, September 29, 2016 / 07:37 am
After spending six years in Washington, DC, as World Bank managing director, Sri Mulyani Indrawati took the helm of the Finance Ministry again starting this July after being appointed by President Joko “Jokowi” Widodo. As finance minister from 2005 to 2010, she helped Indonesia transition from the 1997/1998 Asian financial crisis and sail through the US-led 2008/2009 global financial crisis, but this time the challenges are different, she said. The Jakarta Post’s Endy M. Bayuni, Vincent Lingga, Esther Samboh and Prima Wirayani explored the thoughts of Sri Mulyani about leading a ministry that is responsible for billions of dollars of state assets and budgets and that is largely centered on the goal of creating equitable growth using state assets and fiscal tools, while at the same time reforming the ministry to better execute policies. The following are edited excerpts of the interview.
Question: We would like to explore your work program until 2019. You are known for being tough — you were given the label “Iron Lady” — and we witnessed some tough breakthroughs during your previous tenure as finance minister from 2005 to 2010. Can we expect a repeat?
Answer: When we take the same job for the second time in a different period, of course we must adjust. On the one hand, maybe the strength is familiarity of both the issues and the institution.
I accepted this job with the attitude that at least I’m familiar with the institution. I’m familiar with the regulations and laws that were the foundation of it because being a finance minister means being a public officer who makes decisions not based on personal interests or personal taste. She is governed by law and there’s a political process as a consequence of being a democratic country.
Those I am familiar with — the State Finance Law, the State Treasury Law, the Auditing Law and the State Budget Law — I know how they are formulated and how the political process works. I know the people behind them.
But today is different than 10 years ago. The situation we are facing now has similarities and differences.
In 2004 when I took up the job, Indonesia’s economy was amazingly shadowed by the 1997/1998 crisis. So I started out at the Finance Ministry dealing with the Indonesian Bank Restructuring Agency (BPPN) and with the cost of the crisis and with negotiating with Bank Indonesia (BI) over how to restructure government bonds in the aftermath of the 1997/1998 crisis.
Today, there are similarities in the sense that there’s a crisis ongoing in another part of the world, but the impact spilled over around the world five or six years after the global crisis itself. So countries have exhausted their instruments trying to neutralize the 2009 crisis, be it through monetary policy, quantitative easing, reducing interest rates, or also through expansionary fiscal policies.
So, nowadays, the world is in a situation in which policymakers are faced with problems for which macroeconomic policies have reached their limits. So they have to do extra hard work to revive growth, to create jobs and to create innovations that can boost productivity. It’s a struggle every nation is facing.
We have to be aware of the policies we need to implement, especially to make our people prosperous and equal. The twin words of prosperity and equality are very important these days.
So today, I view this as my focus: How we are going to use our fiscal instruments and other instruments apart from the budget to make sure that Indonesia’s economy becomes productive and competitive and to make sure that prosperity can be enjoyed by most Indonesians, especially the bottom 40 percent of the wealth bracket, and how economic activities create jobs. Because we can have high growth that leaves a lot of people jobless. We can have high growth but inequality occurs.
It’s not about how to create an expansionary state budget or how to spend to create economic growth. The sharper question is: What kind of spending can we adjust to fulfill the wish to create equality? And on the revenue side, what kind of taxation regime can balance the need to safeguard a sustainable state budget, while also creating a competitive and productive economy?
I think that this is the most important priority for the current period.
So we have the law and policies, both of which cannot be implemented without credible and competent institutions to make that happen. If you look at the similarity between myself 10 years ago and now as a finance minister, it is that I am always obsessed and passionate about institutional reform. I believe we can have good laws and good policies, but then they cannot work well because the institutions cannot implement them because of issues of competency, credibility and integrity — all of which need to be built.
For me, the priority is also to make sure that we can design fiscal and state finance policies that will create jobs, increase fairness for the bottom 40 percent and build institutions that can work on the policies consistently, taking into account the existing laws and political processes.
We’d like to take a closer look at taxation policies under your leadership because they are crucial in building the state budget that you desire to address prosperity and equality issues. What kinds of tax policies can we expect to serve that purpose?
There are a number of problems with the implementation of laws on taxation and tax policies. On laws, there are the General Taxation Law (KUP) and the income tax (PPh) and value-added tax (PPN) laws that have existed for a long time without revision.
The latest revision was actually when I was a finance ministry and it was on the PPh law, during which double earners such as husband and wife were allowed to do both joint and separate tax filings. There are many things we reformed. The KUP was also updated to make the tax office do its collection work effectively.
“The sharper question is: What kind of spending can we adjust to fulfill the wish to create equality?”
After 10 years, the conditions and activities of the economy changed. There are a lot of transactions done digitally or online nowadays. We have seen how countries as advanced as the US or Europe get fed up by multinational corporations that can easily avoid taxes by tax shopping. They go to ultra-low tax rate jurisdictions.
On the other hand, finance ministers all over the world are pressed by the need to spend more, be it for education, infrastructure, defense or innovation. So even all the ministers of finance in developed countries feel the pressure that they have to collect enough tax to make sure that they can spend.
So, on the global stage there is a momentum that is different than what I felt 10 years ago. Ten years ago when I talked about tax evasion on the international stage, nobody resonated with that idea. You felt isolated and then you have to hunt [for revenues] while corporations could easily go to any country they viewed as very easy places to avoid or hide their taxes.
Today, the Panama Papers leak has become the burning issue that has made politicians committed to hunting down taxes together in search for fairness.
Globally, all policy makers realize now that imposing fair taxes has become important. Even in the G20 Summit it was mentioned that we had to avoid racing to the bottom, which means for example that Indonesia is not capable of maintaining its competitiveness by charging 25 percent corporate income tax, since Singapore is at 17 percent. Then we try to match Singapore at 17 percent, but then Singapore cuts its rate again to 15 percent. At the end of the day, we are racing to the bottom.
Meanwhile, the fact is that a country like Indonesia has a different complexity, size and level of development. We definitely cannot afford to race to the bottom. Even advanced countries cannot.
That is why we need to revise the laws to make sure that we are up to date, like in the general clauses to ensure the Directorate General of Taxation has enough power, enough instruments and mechanisms with adequate capacity. This is about the institution and how to govern its administration and power.
We also need to update the PPh and PPN to be able to capture economic activities that have grown to become more different because of the presence of the digital economy. The relationship between producers and final consumers has become very close. Lines of distribution are very short and relationships can be borderless because the link between producers and end consumers can be made virtually. That makes the whole chain of the market shrink and shrink all along the way. I think we are not yet aware of the phenomenon of these economic activities, but this is important for us to capture.
My taxation policy would be to mend the laws, reform the tax office and make sure that the policies are growth friendly. Indonesia has a low tax ratio, which means the ability to collect tax relative to the gross domestic product (GDP) is low. However, our economic size is big so we can still boost our ability to collect taxes. In the PPN law we give so much restitution and exemptions that can then lead to inefficiency and give birth to corruption.
We talk about the ability of the tax office to do mapping and hence the tax amnesty becomes important because we want to create a new base. It’s unbelievable that within three months we can collect new information involving a total declared value of Rp 2 quadrillion (US$154.73 billion). The declared assets reflect how much information about economic activities and assets has been undeclared all this while. That depicts how big our undeclared economic activities are.
I’m not saying that they are necessarily subject to tax, but to get the data that tells us about the potential economic activities is such a valuable asset. That’s what is called a tax base. Of course, how the tax office can make use of this data based on its function, professionalism and competence, and without corruption, is a challenge we are facing.
In short, the tax policy would be about fundamental reform both on the regulatory and institution fronts.
But then nowadays I cannot speak of fundamentals only but I have to manage the ongoing state budget. So we see the current state budget and think the tax target was set extremely high considering our existing situation. Therefore, we need to make some corrections in terms of tax revenues.
How will you prevent the moral hazard among tax officials now that the tax amnesty is five months from ending? How will you strike a balance between voluntary compliance, integrity and competence? What are your plans for reform and capacity building for the tax office?
With my previous experience in understanding the Directorate General of Taxation, I have come to understand the approach or the methodology of the office so that I am supposed to be able to discipline them. Regional tax offices each have their own ways and their own data. Without benchmarking, connected data, we can never get optimal tax income.
“We can narrow down who the bad guys are and sometimes we need to use shock therapy on the bad guys and fire them.”
On the one hand it’s about how to benchmark and improve the database, as well as eliminate hindrance in collection. This is the organizational base. Then we talk about capacity and competence. I am certain that there are layers of tax officials who are very competent. Some of them are capable but maybe don’t use their fullest potential because thus far we haven’t been creating accurate targets.
So far our economic growth is 5 percent, plus 4 percent inflation, which create an at least 9 percent tax revenue growth target because we have to follow on the economic size. However, the figures can be interpreted differently. Growth can come purely from the financial sector and may be less taxable. It can come from the mining sector, the taxes of which are managed through existing contracts.
We have no precision and accuracy in mapping our economic activities to determine our real taxable income from both PPN and PPh. This may be the kind of reform that’s less razzle dazzle, but it’s very important.
Data, integrity and confidence need to be matched for the tax office to feel that it has the correct data and that its staff has professionalism so they can knock on any taxpayers’ door, both individuals and corporations, to get them to pay their taxes.
The people can then feel that when they are approached by tax officials, they don’t feel harassed. This is a feeling and perception that needs to be seriously addressed and it boils down to that attitude, the integrity that based on the acknowledgement of tax officials, there’s no longer systemic corruption. Systemic corruption used to be in the form of instructed corruption. However, competence and abusive issues still happen and they admit that they still exist.
If that information is accurate, we can narrow down who the bad guys are and sometimes we need to use shock therapy on the bad guys and fire them. I think moral support for the Directorate General of Taxation is tremendous because I learned from my experience at the Finance Ministry that the majority of officials are good guys; most of them sometimes remain silent.
Overall reform may take a while, but now many big businesses are impressed by the Large Taxpayers’ Office (LTO) services? Do you have any plans to expand the office as part of an effort to widen the tax base and boost compliance?
The idea is there. You should start with big taxpayers. Big taxpayers are usually owners of conglomerates and they have abundant businesses. We gain their data and merge them into one single database file so that the data do not need to be checked and rechecked because everyone, from their account representatives (ARs) to the head of the tax office, hold the same data.
That’s what we did. We established a good LTO that is supported with database, standard operating procedure (SOP), human resources and incentives. After the LTO, we established the special case tax office, which does not serve large taxpayers but those who own foreign direct investment (FDI) companies, with the same SOP, incentives and governance. After that we moved to madya [medium] tax offices for medium businesses.
The most difficult one — and it happened almost at the end of my first term — is to extensively enter into the general public, that is, register people at tax offices called Pratama. At LTOs, one AR deals with only one or two companies, so it’s like a boutique. But at Pratama offices, one AR handles thousands of taxpayers so that the approach cannot be the same because they will never have the ability to work that intensely with them. Their services also do not need to be as intense as when scrutinizing large taxpayers.
This is why risk profiling is important. We have to assume that all people are compliant unless proven otherwise. Changes in the culture, mind-set and approach must be kept going.
I am of the view that my unfinished work is to continue this effort and with the large taxpayers, tax officials must keep scrutinizing them. When the commodity boom happened in Indonesia three to four years ago, why didn’t state revenues move as fast as the boom but instead miss out on it?
In short, I say that we will look again at our old approach to find out if something is missing. With the tax amnesty, we have a new database, which I think will largely contribute to improving our methodology and data. And then we can offer positive incentives to good officials and punish the bad guys.
Be consistent on that and they will see. It can usually turn the morality of the Taxation Directorate General’s 35,000 to 40,000 employees. I think they will feel connected by the idea of showing that we are a trusted and good institution and if anybody stains that reputation, together we will just remove them.
Do you think the tax office now has enough power, by law and regulations, to reach such goals? Are you keen on the idea of a separate tax agency as stipulated in the draft of the revised General Taxation Law?
The Taxation Directorate General already has enough power. It’s not about whether the power is enough or not. The General Taxation Law stipulates a very powerful taxation director general. We just want to make them effective and accountable because that’s what’s lacking. You can give them power, but if it keeps on being abused it will not be effective and taxpayers will be traumatized.
So, the most fundamental issue now is how to build the directorate general as a whole institution to implement the given power in commanding in effective and credible ways. I think from the institution’s design side, there is no separate tax institution in any country. Tax is always a part of a government’s revenue.
What exists and is recognized globally are policy and administration operating levels. In the case of administrative operations, the institution is given enough autonomy so that it will not be constrained in doing its job, and the autonomy is needed. All this time, the Directorate General of Taxation has autonomy because it is big; it has a different structure to other directorates general under the Finance Ministry – the director general even has a deputy.
Therefore, I don’t think it’s about whether the power is enough to have autonomy. The most important and fundamental weakness of the Directorate General of Taxation is competency, integrity and capability and it is the most important work for us to design an institution that is able to create competency and integrity, and eventually credibility. I think that is the most essential thing when discussing the bill and the institution’s design.
On the PPh issue, we would like to confirm your thought earlier on avoiding the race to the bottom. How do you feel about the ongoing discourse to cut the PPh rate in the future?
The principal is that the President wants Indonesia’s economy to be open and competitive, and how to increase the competitiveness probably not just from one side, which is taxation, but we will look at the issue as a whole.
The government has issued many economic policy packages so that we can broaden the competitiveness criteria further than just tax rates. But the President has instructed us to calculate the tax rate cuts’ possibilities and to see if it is within our ability to exercise it without damaging the entire state budget.
This is because cutting tax rates is not about if we are willing or want to. I think in the context of policy making, we have to calculate it responsibly. The Finance Ministry should think about tax revenues and the economy, so the purpose is not solely to slash the rates but also to find out what kind of fiscal policy can reflect the needs of the economy to grow properly, to create jobs and to ensure that the fairness aspect is included.
Don’t forget that if you compare Singapore and Indonesia, Singapore does not have a 10 percent poverty rate, a vast geographical area that needs costly infrastructure or as many remote areas as us. It does not have the bottom 40 percent of kids whose health we need to pay attention to. The point is, our needs are different. We can’t reduce tax rates just to match the rate between ours and the neighboring country simply because we are neighbors.
Indonesia’s upside is that although our rates are high, Indonesia is a big country with a big market. If we can make our economy attractive, this 25 percent versus 17 percent will not be relevant. For me, when we define competitiveness, we have to look at it openly.
“We can’t reduce tax rates just to match the rate between ours and the neighboring country simply because we are neighbors.”
However, as a finance minister whose President has committed to the purpose, our task is to make all the calculations and give them to the President so that he can make an informed decision; a decision made based on information that gives the President political choices.
Since your installment, you have projected a wider revenue shortfall, cut ministries’ spending. What will future efforts be to design a healthy budget?
There are two issues, namely budget design and implementation. Our spending design is to make a state budget calculation that is credible and as solid as possible. This is the element of credibility; we have the base so we can defend it and show that its narration and facts are consistent.
With taxation revenue reaching Rp 1.32 quadrillion there will be enough money for infrastructure spending, salary payments, poverty alleviation efforts, but not enough for us to waste money. It’s so different.
I’m not saying the republic is in crisis and has no money. The money is enough for prioritized and strategic purposes, but not for non-prioritized things. Hence, cuts have been made on spending that would have no impact on work opportunities, economic growth or poverty alleviation.