Indonesia’s brand-new Harmonized Tax Law is evidence of the government’s strong political will in bolstering long-term economic growth. This regulation aims to expand the tax base, strengthen tax administration, promote tax fairness and boost tax compliance. In doing so, several reform measures have been put in place including enhancing the general provisions and tax procedures, revamping the value-added tax (VAT) structure, introducing a carbon tax and initiating a new voluntary disclosure program – tax amnesty “volume 2”.

Tax amnesty – or voluntary disclosure programs (VDPs) – is a common strategy to pursue swift tax revenue in the short term. In the case of Indonesia, the government has ushered in the second tax amnesty from Jan. 1 to June 30 of this year, with the main objective of boosting tax compliance instead of collecting quick tax revenue.  

However, still lingering in our memory is tax amnesty "volume 1", which was given only in 2016 to 2017. This nine-month program brought in Rp 4.88 quadrillion (US$348 billion) of assets declarations, exceeding the target of Rp 4 quadrillion. This success story ran simultaneously with several other strategies to foster the tax ratio, including the implementation of the global Exchange of Information (EOI) extension and strengthening of law enforcement.

These strategies seemed to work very well and resulted in a brilliant 2021 tax revenue performance of Rp 1.23 quadrillion, much higher than the state budget target of Rp1.22 quadrillion.

Then the question is, do we need the second tax amnesty? Will resources be effectively reallocated to make the conditions of tax revenue and tax compliance better with nobody worse off? And how will it affect taxpayers’ attitudes?

Tax amnesty or VDPs are special measures for tax delinquents to manage and unmask their unreported assets related to tax obligations. In the behavioral theory of taxation, a growing body of literature argues that amnesty programs are discriminatory incentive schemes, which likely give off a signal of inconsistency and unfairness.

This might lead to unfavorable attitudes, norms, expectations and behavioral controls that result in the unanticipated intention of non-compliance or even recidivism – in a higher dose than before.

In practice, economists argue that tax amnesty programs should be a one-best-shot strategy, meaning that they are used once in a lifetime. In this context, multiple amnesties become less effective and have a perverse effect on voluntary compliance. For instance, taxpayers will rationally expect there will be another amnesty in the future so avoid paying tax in the present; thus, tax amnesty volume 2 might be responded with dishonesty, untrustworthiness and the expectation of other amnesties in the future.

As indicated earlier, in the short run, tax amnesty may strongly correlate with quick tax revenue. However, this might not be the story in the long run. The quick revenue effects could remain only in the short-term as taxpayers attain the rational point of costs versus benefits – the concept of the rationality of taxation. In the medium- to long-term, this could exacerbate overall tax compliance.

Empirical evidence from several countries demonstrates no significant impact of tax amnesty (either offshore or onshore VDPs) on tax compliance in general. Furthermore, several studies have also revealed that taxpayers tend to compare the benefits of evading tax with the costs of being detected under the new program. In this sense, given the same audit probability, procedures and penalties, taxpayers will not endeavor to be more compliant in the future – this is the “learning curve” of taxpayers.

Returning to the earlier questions then, according to the behavioral concepts of taxation, it is rational to hypothesize that the second tax amnesty might lead to non-compliant behavior and the intention to relapse into delinquency. However, there is still room to anticipate this unfavorable impact if the following measures are in place.

First, it is essential to signal or provide a pseudo edict that the second tax amnesty will be offered only once and could be the final amnesty. Second, the program should be provided exclusively for taxpayers with no prior tax criminal record.

Third, post-amnesty delinquency audits should be extensive, and penalties should be more severe. Fourth, more powerful data integration is a must. These four measures are also highly relevant with the goal of reducing recidivism.

With respect to the implementation, it is necessary for the government to assure taxpayers that the post-amnesty programs will be continuously carried out without discrimination – highlighting the government’s consistency and credibility. In this context, taxpayers must eventually witness that the second tax amnesty is followed by strengthened law enforcement.

In terms of timing, it is also reasonable to utilize tax amnesty volume 2 as the kickstart of the transition to a new, stronger and fairer tax regime. This opportunity is now set with the brand-new Harmonized Tax Law and its upcoming road maps.

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The writer is a senior analyst at the Directorate General of Taxation at the Finance Ministry and a PhD candidate at Crawford School of Public Policy, the Australian National University. The views expressed are his own.