Tax Challenges in 2018
In 2018, tax revenues are projected to reach Rp 1.424 quadrillion, up 23.7 percent from the 2017 realization.
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The tax revenue collection realized by the Directorate General of Taxation eventually reached about 90 percent in 2017, or Rp 1.151 quadrillion of the targeted Rp 1.283 quadrillion.
In fact, as in previous years, 2017 was still a difficult year for raising tax revenues because of various factors. Income tax (PPh) contributed Rp 646.9 trillion to total tax revenues, along with Rp 480.7 trillion from value-added tax (VAT), Rp 16.8 trillion from the land and building tax (PBB) and Rp 6.7 trillion from other taxes.
According to the tax revenue cycle over the last five years during which realization reached 92.6 percent in 2013, 91.6 percent in 2014, 82.0 percent in2015 and 81.6 percent in2016, the realization achieved in 2017 was a turning point. In addition, the contribution (particularly) in December 2017 of 12.8 percent was much higher than the monthly average in previous months, also in comparison to December 2016, and an indication of improved tax revenues.
In 2018, tax revenues are projected to reach Rp 1.424 quadrillion, up 23.7 percent from the 2017 realization. This amount will comprise Rp 855.1 trillion (60 percent) in income tax (PPh), Rp 541.8 trillion (38 percent) in VAT, Rp 17.4 trillion (1.2 percent) in PBB, and Rp 9.7 trillion (0.7 percent) in other taxes. This means that tax revenues will account for 75.6 percent of total state revenues, projected to reach Rp 1.878 quadrillion. Meanwhile, tax contributions to state expenditure (Rp 2.204 quadrillion), including central government spending, regional fund allocations and village funds, will reach 65 percent.
Policies and challenges
In order to realize Rp 1.424 quadrillion in tax revenues, the 2018 State Budget outlines the tax policy.
First, optimize tax potential and tax collection based on the up-to-date data and integrated information systems. Second, improve taxpayer compliance and promote tax awareness to promote compliance. Third, provide selective tax incentives to support the competitiveness of national industries and to encourage downstream industries. Fourth, implement the international tax treaty and the automatic exchange of information (AEOI) agreement. And fifth, implement fairer tax collection for the people to reduce the economic gap.
In the midst of the tax policy, various conditions are not really encouraging, which must be mitigated and managed by the Taxation Directorate General. These conditions could hamper efforts to optimize the tax collection according to taxation rules.
First are the dynamics of the global economy and the international geopolitical turmoil. These include the risks of rebalancing the Chinese economy toward sustainability, US protectionism, the UK’s exit from the European Union (Brexit), and the still fragile Japanese economy. Also worrying are the conditions in the Middle East and the Korean Peninsula. These affect the flow and value of Indonesia\'s exports, imports and investments that will determine our economic growth, which will ultimately affect tax revenues.
Second, compliance remains low. This is common taxpayer behavior in developing countries, including Indonesia, with taxpayers still being reluctant to abide by tax regulations and obligations. The level of compliance depends on the people’s perception of taxes, such as whether they are aware or unaware, understand, care, willing and fully compliant.
The low tax compliance can be seen from the tax ratio of only 10 percent (compared to 15 percent in Malaysia, 17 percent in Thailand and 14 percent in the Philippines) and in the per capita tax of only Rp 4.4 million (Rp 18.9 million in Malaysia and Rp 6.6 million in the Philippines). Individual taxpayers total only about 32 million, compared to a population of about 260 million.
Third, a number of business sectors remain that still require tax exemption, either as individuals or organizations. The proposed tax exemption is sometimes unrealistic, because it does not match the macro condition of a particular type of business. In fact, in the laws on income tax (PPh) and VAT already provide an automatic tax exemption facility.
The Income Tax Law, for example, stipulates incomes that are exempted as tax objects (Article 4, Paragraph 3). Under certain conditions, specific costs can be deducted from an income (Article 6, Paragraph 1). Compensation covers losses of up to five years (Article 6, Paragraph 2), which can reach up to 10 years for certain businesses upon government approval. Taxpayers can even receive tax exemption facilities if they suffer fiscal loss.
As regards the VAT, the law exempts certain “strategic goods” that are not included in the delivery of taxable goods (JKP). So these carry no VAT payment (Article 1A, Paragraph 2). In addition, various types of taxable goods (BKP) and taxable services (JKP) are not subject to VAT (Article 4). If tax exemption applications are approved, the tax revenue will certainly decrease.
Fourth, because of the development of new business patterns, global and local online transactions are still not included in the national account. Because these transactions are online, taxpayers often assume that such transactions are not yet covered by the tax system, although we apply a tax collection system that entrusts taxpayers to calculate, pay and report their taxes under a self-assessment system. Towards the end of 2017, it was encouraging that IT giant Google finally agreed to pay taxes in Indonesia, which can be a model for business patterns and online transactions.
Fifth, many multinational companies still exploit the state or certain authorities or jurisdictions (e.g. tax haven countries) to lower or not even pay their taxes in Indonesia, such as through the transfer pricing model or other financial engineering, so base erosion and profit shifting (BEPS) exists in the calculation of their Indonesian taxes.
Sixth, hidden funds as those in the Panama Papers and Paradise Papers, which were released respectively in 2016 and 2017, shocked the public because many Indonesian citizens were included in the documents. Going forward, hiding funds using those methods mentioned in Panama Papers and Paradise Papers is expected to remain attractive for people who want to avoid paying tax.
Seventh, the readiness of taxpayers to be more open and accepting in line with the information collected from the recent tax amnesty, as well as access to financial information from financial institutions in accordance with Law No. 9/2017 and the implementation of Article 35A of the Law on General Provisions and Procedures of Taxation (KUP). The Taxation Directorate General has a lot of data that can be used in the efforts to optimize tax payments, either through persuading or examining taxpayers.
Eighth, improper use of the taxpayers’ money in providing public goods and services. For example, the poor quality of a number of roads, bridges, health services, education and others. This can make people reluctant to pay taxes.
Shared responsibility
These are among the challenges the Directorate General of Taxation faces that can hamper its efforts to realize the 2018 tax revenue target. As a consequence, if it is not achieved, various needs of the people in terms of the public goods and services included in the state budget cannot be met.
The US government’s recent shutdown could be a valuable lesson for Indonesia, that collecting taxes as a source of state revenue should be a responsibility shared by all parties, and not just the responsibility of the Taxation Directorate General.
Liberti Pandiangan
Head of Counseling, Services and Public Relations at the Directorate General of Taxation, Finance Ministry
