Tax Relaxation and the Economy
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Taxes can affect decisions on savings, employment, and capital investment in the form of goods and human resources quality. Taxes can also influence the decisions of employers and investors on investment or production in creating jobs, the progress of economic development and growth, and people\'s welfare.
With a stagnant economic growth of 5.01 percent in the second quarter of 2017 (the same as the first quarter) following 5.02 percent growth in 2016, a number of economists, such as Didiek Rachbini, Rizal Ramli, and Carmelita Hartoto, have asked to ease (relax) the tax regulation and its implementation. The question is, will relaxing taxes during a period of stagnant incomes and tax ratios can promote economic growth?
In economic development and growth, taxation with a broad tax base and low tax rate is considered better than taxation based on a narrow base and high rates.
Economic development is one of the important factors affecting the breadth, variety, and scale of the tax base (Alex Radian, Mobilizing Resources in Poor Countries, 1980). A study on developing the country\'s tax capacity shows that obstacles to increasing tax revenues include economic growth, population income, domination of the agrarian and informal sectors, and development of the manufacturing and trade sectors.
Urgency for Relaxation
Development is the main mechanism for increasing revenues and tax ratios by reducing obstacles and expanding taxation coverage. In addition to improving peoples’ incomes and welfare, development also enhances economic structure through hard-to-tax production, such as the agricultural sector, the domestic industry and the informal sector, and through easy-to-tax production and trade sectors,such as advanced manufacturing and trade and the formal sector.
Developed countries are better able to mobilize more funds than developing countries because they have a larger number of taxable objects and a diverse taxation base accessible to effective and efficient administrative mechanisms.
In Radian, Richard A. Musgrave explains that economic progress reduces taxation barriers through expanded tax coverage, so that tax revenues and rates increase.
According to Musgrave,the nature and character of the tax base will change in line with changes in the economic structure due to economic development, and the use of appropriate taxation systems can mobilize revenue effectively and efficiently. Development transforms the economic structure of the agriculture and manufacturing industries into more complex and large-scale industries.
A large number of people work in large national and regional and businesses, even multinational corporations. At this economic level, almost all cash flow (potential income tax), goods and services (the potential for value added tax and sales tax), are channeled automatically through an online network and organized marketplace so that it can be transferred to the state treasury at any time.
The conventional theory of Harley H. Hinrichs (1966) states that, therefore, part of the government\'s gross domestic product in the form of tax revenues increases in line with progress in economic development. The more advanced the economy, the more taxes that can be mobilized. Taxation design and implementation affect development activities and economic growth.
Theoretically, taxation policies can be designed tospur economic development and growth in line with economic conditions, for example by raising the tax rates during an economic boom and relaxing them in times of economic stagnation and downturn.
In the framework for economic stabilization, Musgrave (1989) says that a good tax structure should facilitate the preparation of fiscal policy for economic stability and growth.
The state budget generally serves as an element of economic stabilization automation in order to accelerate the wheels of the economy and increase growth. In addition to an increase in government spending, Matthijs Alink & Victor van Kommer (2015) mention the possibility of a decline in revenues due to tax relaxation.
To achieve the 5.2 percent growth target, Indonesia may need to consider tax relaxation measures – as mentioned by some of the economists above – to encourage investment, business and economic activities. Tax relaxation can be carried out in policy (regulation) or administration (controlled enforcement and implementation of regulations in the field).
However, tax relaxation measures should be designed and controlled carefully so they will be effective and efficient, not counterproductive and worsen business and investment climates. In addition to relaxing regulations and their implementation, easing the tax can be carried out through the provision of incentives or waivers, which may be inevitable both politically and economically to improve the business and investment climates in strategic sectors and in sectors that affect the people’s livelihood for growth and equity.
Income distribution, if it is followed by the implementation of a uniform and structured tax collection, for example through a withholding tax system, can reduce the tax imbalance between Income Tax (PPh) Article 21 for employees and the PPh Article 25/29for entrepreneurs, whose taxes are partly collected as taxable incomes based on Articles 21,22 and 23.
Object of relaxation
Of the 2017 revenue target of Rp 1.30 quadrillion, about Rp 601.1 trillion (46.8 percent) has been realized as of July at a growth of 12.4 percent – lower than the targeted 18 percent.
Tax observer Yustinus Prastowo said he was optimistic that tax realization in 2017 would range from 85 percent to 91 percent of the target. To realize the 2017 revenue target, the government needs to undertake extra and maximized work through issuing regulations, such as the regulation in lieu of law (Perppu) No. 1/2017 on financial information access for taxation, Finance Minister Regulation No. 213/ 2016 on Transfer Pricing Documentation (TPDocs), and PMK No. 107/2017 on foreign companies. Through such efforts, the government expects Rp 59.5 trillion in additional revenues.
Over the past three decades, the self-assessment system (taxpayers calculate, pay and report taxes by their own) of voluntary compliance has been implemented in the country. However, there are some disadvantages, such as the people’s lack of awareness, enforced compliance through withholding tax and third-party data reporting, utilizing information technology in early detection of noncompliance, and monitoring mass compliance through data matching analysis, which have caused stagnation in the tax ratio at 11 percent and tax compliance at 63 percent.
Even corporate taxpayer compliance in the oil palm plantation sector in 2015 was 46.3 percent, (70.6 percent in 2011), and individual taxpayer compliance was6.3 percent (42.3 percent in 2011). To increase tax compliance, the tax administration must continually nurture, monitor and foster the people’s awareness and willingness to comply with the Tax Law.
In a self-assessment system, the tax administration must continue to maximize compliance with the Tax Law.In line with the deterrent effect theory, compliance will increase if the probability of detection and the imposition of severe sanctions is high,so that the cost of compliance is cheaper than that of non-compliance.
However, law enforcement measures (such as control) are costly, while intensifying control measures may disrupt the business and investment climates and aggravate compliance costs, frustrating citizens in the end.
The potential deficit in revenues can reduce the government\'s ability to increase the budget for development and growth. Compliance should therefore be promoted in order to reduce the deficit. However, to maximize compliance and minimize deficit, close monitoring is needed.
On the other hand,the business and investment climates should remain conducive so that the tax potential will grow. Relaxing the tax regulation and administration simply cannot be ignored.
For an example, relaxation through 1) the PMK 213/2016 is restricted only to transactions between parties with special relations pursuant to Article 18 (4) of the Income Tax Law with a minimum turnover of only Rp 50 billion. Aside from the high cost of compliance, TP Docs has no effect on the examination; 2) the PMK 107/2017 applies only to direct ownership (individual and collective) of more than 50 percent, so it is simpler and more effective in accordance with Article 18 (2) of the Income Tax Law.
Then, 3) the utilization of banking and tax amnesty data is limited to potential data; 4) transactions for retail entrepreneurs should be without restriction and if their annual turnover exceeds Rp 4.8 billion, their status should be changed to corporate taxpayer based on Article 2 of the Law on General Provisions and Procedures of Taxation (UUKUP) and 5) e-commerce companies (including Google Pacific Ltd Pte) should be deemed a permanent business entity(BUT), to be followed by the issuance of a Decision on the Reduction of Taxes (SKPKB) under Article 23 of the Tax Law on WPDN (domestic taxpayers) with service users limited to the current year (2017), which can be counted as a tax deduction.
Hopefully, the tax relaxation policy and its implementation can spur development and growth, and improve the welfare of the people so that the full potential of tax revenues can be fully realized.
GUNADI
Professor of taxation at the Faculty of Administrative Sciences, the University of Indonesia
