A New Tax Strategy
As of October 2019, tax revenues totaled only about Rp 1.01 quadrillion (US$72.70 billion). This figure is 64.6 percent of the tax revenue target of Rp 1.57 quadrillion stipulated in the 2019 State Budget.
The threat of not achieving the tax revenue target and the widening of the tax shortfall is becoming more certain. As of October 2019, tax revenues totaled only about Rp 1.01 quadrillion (US$72.70 billion). This figure is 64.6 percent of the tax revenue target of Rp 1.57 quadrillion stipulated in the 2019 State Budget.
The weak performance of the tax revenues will certainly have an impact on Indonesia\'s fiscal condition. The efforts to meet the tax revenue target for 2020 will also be quite challenging. At the same time, economic pressures require relaxation in the form of tax relief.
Tax reform in the context of boosting the tax ratio (the ratio between tax revenues and gross domestic product), has been carried out in conjunction with efforts to encourage competitiveness and boost the national economy. So, what should be done to halt the shortfall of tax revenue since 2009?
Reflection 2019
In a way, we entered 2019 with high optimism, partly because the realization of tax revenue in 2018 was encouraging. The tax ratio again shows an increasing trend after experiencing a downward trend over the previous three years. However, there are several factors that distort this positive trend.
In addition to the effects of the presidential and general elections, we have also witnessed falling commodity prices, fluctuations in international financial markets, trade wars and disruption of global supply chains, as well as weakening export-import performance.
As a result, the performances of main economic sectors and tax revenue from the main economic sectors that are usually dominant are even more lethargic. In addition, in 2019 the government also put a little brake on making significant breakthroughs in optimizing tax collection. The economic relaxation (incentives) in a bid to create a conducive situation can be considered as one of the reasons of the poor tax performance.
This condition that can be considered an anomaly seems to have a big effect on tax revenue. According to the DDTC Fiscal Research’s estimate that tax revenues in 2019, based on normal condition scenario, will range from Rp 1.36 quadrillion (pessimistic) to Rp 1.39 quadrillion (optimistic). This means that the tax shortfall will range from Rp 179 trillion (88.6 percent of the target) to Rp 216 trillion (86.3 percent of the target).
However, as the 2019 economic situation tends to be abnormal, the performance of tax revenue could be worse. In the worst-case scenario, tax revenues are expected to reach only Rp 1.31 quadrillion and the tax shortfall will increase to Rp 259 trillion (Febrantara, Yustisia, and Vissaro, 2019). The budget deficit and government debt are likely to increase.
However, this risk needs to be addressed properly. One of the solutions available to cope with the shortfall at the end of the year is to take the advantage of automatic exchange of information (AEoI) data and financial information from third parties to prevent tax avoidance. And the rest is to use the available energy to establish a clearer strategy for 2020.
Next year the tax revenue target is set at Rp 1.64 quadrillion. The target grew only 4.1 percent from the 2019 target of Rp 1.57 quadrillion. However, if the shortfall increases to Rp 259 trillion, inevitably the 2020 tax revenue would have to grow as high as 24.6 percent. The growth rate is arguably quite difficult to achieve if there is no new strategy, especially amid the current economic slowdown.
Challenge in 2020
2020 is also the first year of President Joko “Jokowi” Widodo\'s second term. In his inauguration speech in front of the People\'s Consultative Assembly (MPR) on Oct. 20, the President outlined five program priorities, namely the development of human resources (HR), infrastructure development, simplification of regulations, simplification of bureaucracy, and economic transformation.
Implicitly, the fiscal regime for the next five years will stand on two elements, encouraging competitiveness while mobilizing revenues. A number of programs to promote competitiveness through relaxation have been introduced such as in the forms tax relief policies and the preparation of the draft of the omnibus law regarding tax provisions for strengthening the economy.
Tariff cuts and various tax incentives have been introduced lately. Unfortunately, efforts to increase tax revenue seem to be "sidelined". It is true that we face slowing economic challenges, but taxes should not be considered a frightening specter of the national development agenda.
Taxes also should not necessarily be "defeated" amid the efforts in winning the hearts of investors and creating national competitiveness. In fact, taxes are an inseparable part of the way to realize the noble ideals of the Indonesian people.
In fact, taxes are an inseparable part of the way to realize the noble ideals of the Indonesian people.
The achievement of 17 programs in the Sustainable Development Goals (SDGs) also has prerequisites for increasing the tax ratio to at least 15 percent (Gaspar, etal, 2019). Thus, the efforts to increase tax revenues should be supported by all levels of society.
Relaxation and participation
In order to balance the economic relaxation with the efforts to increase tax revenues, a new tax strategy called "Relaxation-Participation" is needed. This means that tax relaxation must be conditional and requires reciprocity in the form of public participation in the tax system.
It is important to underline that relaxation in the tax system includes law, policy and administration. There are four Relaxation-Participation strategies.
First, the relaxation should be given in exchange of community participation in driving the economy.
In this area, the tax relaxation can be provided as long as the taxpayer carries out activities required by the government in certain sectors, types, locations, and /or values. In short, there is government intervention regarding the behavior of taxpayers.
This policy feature has actually been reflected in several tax facilities such as super tax deduction for vocational activities and tax holidays. Other things that can be considered, for example, are the
prerequisites for reinvestment in Indonesia in exchange of the exemption of tax on dividend of foreign companies and business expansion in exchange of the acceleration of tax refunds.
Second, the relaxation of tax facilities can also be given in exchange of data and information. For example, in the implementation of cooperative compliance, the transparency of taxpayers can be exchanged with certainty.
The same strategy can also be applied in the financial sector and digital platform providers (OECD, 2019). The success of this strategy must be supported by the existence of uniformed data and information formats provided by the Taxation Directorate General.
Third, the relaxation should be based on taxpayers’ compliance. It can be implemented, for example, by imposing alternative taxes on indications of corporate tax avoidance, a more proportional tax sanction based on the compliance profile of the taxpayer. This strategy requires the grouping of taxpayers based on the compliance risk management scheme.
The key is to place the tax sector as the main agenda to advance Indonesia.
Fourth, relaxation is offset by certainty of tax contribution. This strategy is given to groups that receive high fiscal benefits but give little tax contribution. There are several options that can be considered, such as the imposition of net wealth-based taxes to the group of capital owners who benefit from the omnibus law, safe harbor in affiliated transactions and on certain professional groups.
The Relaxation-Participation Strategy above must be supported by the institutional strengthening of tax authorities, sustainable tax inclusion, and the availability of qualified information technology on tax administration.
Its success will rely on collaboration with all stakeholders, such as academics, tax courts, tax consultants, business associations, other government agencies, local governments, and so on. In this case, political commitment and leadership are needed. In the end, the achievement of future tax revenue targets for the independence of the nation is something that is not impossible.
The key is to place the tax sector as the main agenda to advance Indonesia. Therefore, the slogan which reads “With Strong Taxes, Indonesia Progresses” is not excessive and is quite true.
Darussalam, DDTC Managing Partner