Indonesia's Tax Amnesty Program to End Soon, Any Structural Impact?
Indonesia's tax amnesty program will end soon. The nine-month program was designed to finish on 31 March 2017. Although the program has become the world's most successful tax amnesty program, it will fail to solve Indonesia's tax revenue collection problems. And with tax revenue being the largest source for public spending capacity, low tax compliance in Southeast Asia's largest economy obstructs more rapid development of the Indonesian economy.
Indonesia's tax collection ratio is well below the global average and despite the fact that more than 745,000 Indonesian taxpayers joined the government's tax amnesty program, declaring about IDR 4,642 trillion (approx. USD $349 billion) worth of previously undeclared assets, the amnesty program's fruits may be limited. The central government of Indonesia targets to collect IDR 1,498.9 trillion (approx. USD $113 billion) in tax revenue in 2017 (including custom duties), up 16.8 percent (y/y) from tax revenue realization of IDR 1,283.6 trillion in the preceding year. This should be another too ambitious target (over the past decade Indonesia rarely achieved its tax revenue target).
We saw the same in 2016. Although the tax amnesty program's first phase (July - December 2016) was most successful in terms of asset declarations and penalty payments, Indonesia failed to achieve its tax revenue target, by a distance. Indonesia's tax revenue realization in 2016 reached IDR 1,283.6 trillion but in the Revised 2016 State Budget authorities targeted to collect IDR 1,539.2 trillion, implying a shortfall of IDR 255.6 trillion. Without the tax amnesty program the shortfall would have been larger.
During the first two months of 2017 Indonesia's tax revenue collection only grew 8.2 percent from tax revenue collection in the same period one year earlier, well below the 16.8 percent growth rate that is targeted by the government. Moreover, Yustinus Prastowo, Executive Director of the Center for Indonesia Taxation Analysis (CITA), said the 8.2 percent growth pace in the January-February 2017 period is a natural phenomenon that comes on the back of Indonesia's accelerating economic growth, and cannot be attributed to the impact of the tax amnesty program. This statement (and figures) imply the structural impact of the tax amnesty program on tax revenue collection is very modest.
Indonesia's Tax Revenue Target and Realization 2012-2017 (including custom duties):
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| Target (in IDR trillion) |
1,016.2 | 1,148.4 | 1,246.1 | 1,489.3 | 1,539.2 | 1,498.9 |
| Realization (in IDR trillion) |
980.5 | 1,077.3 | 1,146.9 | 1,240.4 | 1,283.6 | |
| Realization (%) |
96.5 | 93.8 | 92.0 | 83.3 | 83.4 |
Source: Investor Daily
Meanwhile, the Indonesian Young Entrepreneurs Association (HIPMI) is disappointed that most of asset declarations under Indonesia's tax amnesty program involve onshore assets, while it claims about IDR 10,000 trillion (approx. USD $752 billion) worth of funds are secretly stashed offshore, mostly in the so-called tax havens. HIPMI praises those who declared onshore assets as they showed their "patriotic hearts".
Fund repatriations into Indonesia (under the tax amnesty program) have been disappointing, failing to reach the government target. This is most likely the result of the unattractive requirements that were set by the government. For example, it required taxpayers to keep the assets in specific investment instruments in Indonesia for at least three years. So far, only IDR 146 trillion worth of assets were repatriated, only about 15 percent of the target. Most of these assets, nearly 60 percent, originate from Singapore.
Tax Amnesty Program Indonesia - Score So Far:
| Target (in IDR trillion) |
Per 26 Mar '17 (in IDR trillion) |
Achieved | |
| State Income |
165.0 | 122.0 | 73.9% |
| Declaration of Funds | 4,000.0 | 4,642.0 | 116.1% |
| Repatriation of Funds | 1,000.0 | 146.0 | 14.6% |
Source: www.pajak.go.id/statistik-amnesti
Tax compliance is very low in Indonesia. Only around 28 million Indonesians - out of an adult population that numbers over 185 million people - are registered taxpayers. However, only a mere 11 million people actually fulfill their tax obligations. According to information from the Ministry for Economic Affairs, a total of at least 44 million Indonesians should pay taxes, implying there exists rampant tax evasion in the country. This is partly caused by the big informal sector - both rural and urban. Although it is difficult to pinpoint the exact number, it is estimated that between 55 and 65 percent of employment in Indonesia can be labelled informal. Today, around 80 percent of this informal employment is concentrated in the rural areas, particularly in the construction and agriculture sectors.
According to the World Bank, poor tax compliance among Indonesia's high income earners curtails poverty reduction and the combat of income distribution inequality. The richest one percent of Indonesia's society controls nearly half of the country's total wealth.
Besides the low intention of Indonesians to pay taxes, tax evasion is made possible by weak government monitoring and weak law enforcement. Moreover, it is assumed that a significant portion of tax money ends in the pockets of government officials (and this makes Indonesians unwilling to pay taxes). But apart from (perceived) corruption, there is also a shortage of tax officials mainly due to budget constraints and bureaucratic hurdles. There are currently only 38,000 Indonesian tax officials, implying there is one tax official per 7,000 Indonesians, an alarmingly weak ratio compared to other countries. Indonesia therefore needs at least 62,000 more tax employees.