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Jakarta Post

Tax amnesty revisited

  • The Jakarta Post

    The Jakarta Post

  /   Fri, February 6, 2015   /  09:48 am

The government and the House of Representatives are again mulling over the bold yet politically sensitive initiative of granting tax amnesty to net more taxpayers in a bid to repatriate the estimated multi-billion US dollars that Indonesian conglomerates reportedly have parked overseas since the 1998 political and economic crisis in Indonesia.

The tax-amnesty idea has been in and out of public policy debate since early 2003 with the full support of the business community, but the policy has until now failed to win the House'€™s consent because such a drastic tax policy is seen as an insult to the public'€™s sense of justice, a blank check for businesspeople and tax evaders to legally launder money back home.

But the idea seems more economically palatable now as the government is strapped for new investment to improve crumbling infrastructure, which has become one of the main barriers to capital inflows and economic growth.

Despite the risks of moral hazards and the poor credibility of tax-law enforcement, tax amnesty is not without a strong rationale, especially in Indonesia, where tax evasion has always been quite extensive, as indicated by the mere 12 percent tax ratio (tax revenues as a percentage of the gross domestic product).

The proponents of tax-amnesty argue that since the corruption-infested tax directorate general is unable to hunt down tax evaders and uncover their hidden assets, there is no harm in offering them one-shot amnesty if this measure can lure back massive capital inflows. Conglomerates will not hesitate to reinvest in Indonesia to expand the economy and create jobs once their previously hidden assets are declared legitimate under the amnesty program.

Another potential benefit is the big chance of netting a large number of new taxpayers, including small and medium enterprises (SMEs), thereby broadening the tax base for future tax collection. Moreover, as the court system is both corrupt and overburdened, tax amnesty may allow the tax office to economize on prosecution costs.

But the opponents of tax amnesty also have equally valid points against introducing such a scheme at least until an efficient, strong tax administration system is established. Successful tax amnesty programs in developed and developing countries have shown that the facility should be provided through a good mechanism and the tax amnesty period should immediately be followed by strong law enforcement against tax evaders and manipulators.

Unless carefully designed and supported with strong infrastructure of tax information intelligence to detect future tax delinquency, a tax amnesty program could instead cause moral hazards as people, expecting more amnesty in the future, will lower their tax compliance and honest taxpayers will be discouraged to continue voluntary compliance.

There are thus both great potential benefits and big risks inherent with the granting of tax amnesty. Which of the effects will materialize depends on the ability of the tax administration system to implement the program.

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