Joko Widodo’s Mission to Enhance Tax Collection in Indonesia
One strategy of Indonesian President Joko Widodo to generate more state revenues in order to enhance investments in social and economic development of Indonesia is by improving the country’s tax collection system. As the middle class as well as number of companies that are active in Indonesia has risen rapidly in recent years, it is disappointing that tax collection targets are rarely met in Southeast Asia’s largest economy: tax compliance is low, while corruption among civil servants (tax collectors) remains a structural problem.
Indonesia’s current tax-to-GDP ratio lies in the range of 12 and 13 percent; a low figure compared to developed countries (that generally have +25 percentage point ratios) and emerging markets. For example, Indonesia’s tax-to-GDP ratio is much lower than the ratio in Thailand (17.0 percent), Malaysia (15.5 percent), Philippines (14.4 percent), Singapore (14.2 percent), and Vietnam (13.8 percent). Such low tax-to-GDP ratios signal that governments’ financial management is inadequate (and - often the case - plagued by corruption).
Joko Widodo (perhaps better known as Jokowi) pledged to raise this ratio to 16 percent by the end of his first term (2019). And this may be more than an empty promise as Jokowi proved his ability to improve tax collection at his previous posts as Governor of Jakarta (2012-2014) and Surakarta (2005-2012). In Jakarta, locally generated revenues increased from IDR 30.6 trillion in 2012 to IDR 41.5 trillion in 2013, while in Surakarta locally generated recurring revenues rose 12.5 percent. This success may be repeated on a national level.
In 2014, the government lowered its tax revenue target from an initial IDR 1,110.2 trillion (USD $94.9 billion), set in the 2014 State Budget, to IDR 1,072 trillion (USD $91.6 billion), set in the revised 2014 State Budget. Whether the revised target can be met remains unknown. Next year, the government targets to collect IDR 1,380 trillion worth of taxes.
Tax revenue (particularly corporate income tax) accounts for about 80 percent of total state income in Indonesia.
Newly appointed Finance Minister Bambang Brodjonegoro will be tasked to optimize state income from the tax sector. The government will start a campaign which will see enhanced profiling of taxpayers and more tax officers. The minister added that one of the easiest strategies would be to allow the tax office to access domestic bank accounts of tax payers.
Key Findings:
• The government of Indonesia fails to generate sufficient tax income due to weak fiscal management, lack of manpower, lack of law enforcement and corruption
• Indonesia’s current tax-to-GDP ratio is between 12 and 13 percent (a very low figure)
• President Joko Widodo targets to raise the tax-to-GDP ratio to 16 percent by 2019. Widodo has a proven track record in raising this ratio as Governor of Jakarta and Surakarta
Further Reading:
• Tax Compliance & Enforcement in Indonesia Remain Troublesome
• Tax in Indonesia: Indonesian Tax-to-GDP Ratio and Tax Compliance Still Low
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