What is the Problem with Tax Collection in Indonesia?

Earlier, the DPR proposed that tax amnesty policies should include a pardon for local businesses engaged in the country's large informal sector as these businesses often refrain from registering due to fears of incurring back taxes.

Indonesia's tax amnesty policy would grant tax evaders who are living abroad the opportunity to bring back funds to Indonesia. As it requires time to discuss and - if agreed upon - implement the new policy, it will most likely be too late to boost tax collection in 2015. In the Revised 2015 State Budget the Indonesian government set a tax revenue target of IDR 1,294 trillion (approx. USD $96 billion). However, Taxation Director General at the Finance Ministry Sigit Priadi Pramudito, expects that only 91.3 percent of the target will be achieved by the year-end. This wide shortfall would undermine the government's cash flow as well as the financing of government programs (roughly 75 percent of the State Budget is financed through corporate and value-added taxes).

Regarding the 2016 State Budget, the Indonesian government proposes to set a tax revenue target of IDR 1,369 trillion (approx. USD $101.4 billion), up nearly six percent from this year's target and therefore considered overly ambitious given that this year's target will not be achieved. Moreover, Indonesia has a bad track record in terms of successful tax revenue target realization as it only managed to achieve its tax revenue target twice in the past decade. As such, the government has to walk the fine line between setting a high tax revenue target (in order to keep everyone on their toes) and being realistic (not achieving targets time after time undermines confidence in the government's authority).

Disappointing tax collection is partly caused by Indonesia's slowing economic growth (which curbs companies' profits and sales) and low commodity prices. However, Indonesia has much more structural problems that explain the country's current low tax-to-GDP ratio. It is estimated that Indonesia's tax-to-GDP ratio stood at 10.8 percent in 2014, thus being among the lowest worldwide. Advanced nations tend to have a ratio between 25 and 50 percent. More alarmingly Indonesia is also outperformed by regional emerging peers such as Thailand (17.0 percent), Malaysia (15.5 percent), Philippines (14.4 percent), Singapore (14.2 percent), and Vietnam (13.8 percent).

Firstly, tax compliance is low. Only around 27 million Indonesians - out of an adult population that numbers over 185 million people - are registered as taxpayer. However, only 10 million actually fulfilled their tax obligations. According to information from the Ministry for Economic Affairs, a total of at least 44 million Indonesians should pay taxes. This indicates rampant tax evasion. the informal sector - both rural and urban - still plays an exceptionally big role in the Indonesian economy. Although it is difficult to pinpoint the exact number, it is estimated that between 55 and 65 percent of employment in Indonesia can be called informal. Today, around 80 percent of this informal employment is concentrated in the rural areas, particularly in the construction and agriculture sectors.

Secondly, tax evasion is made possible by weak government monitoring and weak law enforcement in Southeast Asia's largest economy. Moreover, it is assumed that a significant portion of tax money ends in the pockets of government officials (which also 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. Sigit Priadi Pramudito said there are currently only 37,000 Indonesian tax officials, implying that there is one tax official for each 7,000 Indonesians, an alarmingly weak ratio compared to other countries. Pramudito said Indonesia needs 62,000 more tax employees.

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