The Jakarta Post
The government and the House of Representatives seem to have agreed to explore the possibility of undertaking a new tax amnesty. The objectives of a tax amnesty, to name a few, are: alleviating the budget deficit by increasing tax revenues; improving tax compliance and inducing the repatriation of capital from overseas.
But the success of temporary amnesties depends on a quick, convincing change in the revenue authority's behavior. In other words, a tax amnesty will only be effective if it is unanticipated and supported by associated regulations and a modernized tax administration, especially on tax enforcement.
Most experts agree that an unanticipated one-time amnesty, accompanied by a change in the general tax system, has a promising chance of success ' where success is measured by generated revenue and/or compliance rates, in the short run as well as in the long run.
Amnesties around the world have varied in the types of taxes covered, but also to the extent to which individuals should participate in the program. Some amnesties have allowed those who were already under investigation or those with tax arrears to participate while others have not.
Like any other public policy, there are costs and benefits of a tax amnesty program. Tax policy analysts Hari Sharan Luitel and Russell S. Sobel, in their book The Revenue Impact of Repeated Tax Amnesties (2007) summarized the benefits as: bringing people back to the path of honesty who became tax delinquent by mistake; removing the guilty feeling of otherwise ordinary citizens; an appropriate measure before increasing penalties and enforcement or the transition to a new tax regime; government credibility; enlarging the tax base as many taxpayers are brought back into the tax system; generating both short and long term revenues for the government; reducing the administrative costs of tax collection and improving tax compliance by monitoring newly registered taxpayers.
Furthermore, they also analyzed costs arising from the amnesties, such as: undermining the tax morale such that honest taxpayers may actually start evading taxes; making people aware of the presence of noncompliance in the tax system and anticipation of repeated tax amnesties.
In Indonesia, problems with tax noncompliance are pervasive and cover all economic sectors.
Under behavioral economics, taxpayers look for factors such as fairness, a sense of belonging to the community imposing the taxes and a belief that taxes received by the government will be used properly to contribute to improved tax compliance.
If government contributes to making the tax system fairer, improves taxpayers' sense of belonging (building their sense of identity with the larger community) and demonstrates that taxes are being used productively, tax compliance will increase without any change in economic incentives (Morris Altman, 2012).
By improving noneconomic incentives, sometimes even reducing the size of the stick or punishment, tax compliance increases.
Tax administrations in some countries have rigorously conducted tax amnesty programs with various modifications since the 1980s. India (1997), Republic of Ireland (1988) and Italy (1982, 1984 and 2001/2002) were successful in applying their tax amnesty programs. On the other hand, tax amnesty programs in Argentina (1987) and France (1982 and 1996) were considered to be less successful, being solely intended to reverse illegal capital outflows.
Under this amnesty, the French government lowered the tax rate and abolished the wealth tax.
Almost all states in the United States exercised tax amnesties with a variety of structures and intervals during the period of 1981 to 2011. Several countries attempted to stimulate the return of capital by combining tax amnesties with other structural changes, such as rate adjustments and tax incentives.
Taxpayers were exempted from taxes of all previously unreported income that were used for investment and business purposes.
Moreover, to attract capital inflows, the tax institutions set lower effective tax rates ultimately in sectors where it was easier to move into the informal economy. For example, South Korea reduced its effective corporate tax rate from 53 to 27 percent, while corporate tax receipts doubled as a fraction of GDP (Roger Gordon, 2012).
In Indonesia, the so-called Sunset Policy, an amnesty conducted in 2008, helped to increase the number of taxpayers by around 5.36 million and revenues by as much as Rp 7.46 trillion (US$582 million). However, the program did not have a long-lasting effect on the improvement of the tax ratio.
Since the Asian financial crisis in 1998, around four major tax reforms have taken place in Indonesia focusing on the modernization of the Directorate General of Taxes (DGT).
According to Yond Rizal (2012), the objectives of the reforms were mainly to create greater public trust in the DGT, more productive and accountable tax officers and better tax compliance.
It is still undeniable that after more than a decade of tax modernization and seven years after the Sunset Policy, tax noncompliance and corruption are still rampant causing major constraints on the effectiveness and efficiency of tax collection.
In Indonesia, problems with tax noncompliance are pervasive and cover all economic sectors. During the reforms, the DGT has formulated and implemented programs and activities to increase taxpayers' attentiveness and voluntary compliance, especially for the noncompliant taxpayer, and create more effective law enforcement.
To achieve the long-term goals of the program, there are some necessary conditions that must be fulfilled, such as voluntary tax compliance, better use of information and communication technology tools, to enhance the ability of the administrator to investigate tax evasion; increased tax employee capability and capacity; strong political leadership; positive government rules and discretion; conducive political-economic conditions; more autonomous tax administration and less political interference; and synchronization of regulations on tax collection, investment and other business regulations.
The objective of the previous Sunset Policy in Indonesia was to widen the overall tax base and increase the tax ratio. President Joko 'Jokowi' Widodo has instructed the finance minister to bolster tax revenues for the revised state budget 2015 in order to create a more sustainable and healthy budget.
The President has also shown his capacity and capability to execute a bold decision like raising the fuel price. This type of behavior is important to get people's trust and belief in his future policies and discretion.
For the case of Indonesia, the design of the next tax amnesty, if necessary, should not create more tax noncompliance as honest taxpayers may start evading taxes after the implementation of a tax amnesty.
A well-designed tax amnesty program accompanied by a stronger system of tax collection has the potential to lead to beneficial results.
Darrusalam is managing partner of the Danny Darussalam Tax Center and Adri A. L. Poesoro is an economist at the Danny Darussalam Tax Center.
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