After the end of the commodity boom, and with an ailing infrastructure, Indonesia needs to increase its declining revenues and strengthen its international competitiveness. A tax amnesty is intended to be a cornerstone initiative, write Natasha Hamilton-Hart and Günther Schulze
Since 2011, when commodity prices started to decline and growth slowed, Indonesia has faced the twin challenges of increasing competitiveness and restoring fiscal space. As we have written in the latest survey of recent developments in the Bulletin of Indonesian Economic Studies the Joko Widodo (Jokowi) government has made improving competitiveness a major focus. Indonesia needs to increase productivity, enhance its ailing infrastructure and foster growth and service delivery in areas such as health and education. In order to do so, it needs to regain fiscal space in the face of declining revenues and a three per cent budget deficit limit stipulated by law.
Sri Mulyani Indrawati, who returned as finance minister after a cabinet reshuffle in July 2016, cut non-essential expenditure in order to secure high-priority spending on infrastructure. Even though there may be some short-term productivity gains, it is clear that government revenues need to be increased. Indonesia’s public revenues and spending are very low in international comparison: tax revenue stands at 12 per cent of GDP, a ratio that has declined over the last two decades.
The government stepped up revenue raising efforts in 2016. Its flagship initiative was the tax amnesty, which was finally passed into law by the Indonesian parliament in June. Under its provisions, the amnesty began in July 2016 and will run until end of March 2017. Those disclosing assets not previously reported in annual tax returns receive promises that penalties and overdue tax liabilities due to previous non-disclosure will be waived and that they will not face an audit into the source of their previously undeclared assets or earlier returns. The levy schedule ranges from two per cent of the net value of assets not previously declared for domestic assets (or overseas assets repatriated to Indonesia) and declared before the end of September 2016, to 10 per cent for assets not repatriated to Indonesia and declared in the final three months of the amnesty.
The end of September marked the end of the first and most advantageous phase of the amnesty, in the sense of taxpayers incurring the lowest levy. Despite widespread scepticism, the amnesty has been far more successful than most observers anticipated. Several high-profile tycoons made very public amnesty declarations and the country was awash with advertising and news of the amnesty (read more on this here, here and here). At the end of the first phase, over 300,000 taxpayers had declared their assets and government revenues from penalty payments on these assets amounted to over Rp 97 trillion. This represents about 59 per cent of the government’s official revenue target of Rp 165 trillion (approximately US$12.7 billion).
However, the amnesty has most notably fallen short of its target in the repatriation of assets held overseas. By the end of the first phase, repatriated assets amounted to Rp 137 trillion against an official target of Rp 1,000 trillion. Over half of all repatriated assets came from Singapore, but a much larger amount of assets were declared as being held in Singapore (Rp 652 trillion or US$50 billion) than repatriated from Singapore (Rp 79.1 trillion). The figure for declared Indonesian assets held in Singapore is in turn much lower than the estimated $200 billion in Indonesian-owned assets managed by private banks in Singapore.
One crucial factor for the relative success of the amnesty may have been that Singapore has agreed to implement the OECD’s Common Reporting Standard, with the first exchange of information scheduled for 2018. This was widely reported in the Indonesian media and may have made tax evasion more difficult.
However, the amnesty’s success must be evaluated against a broader set of goals than the additional short-term revenue. It aims to repatriate assets held abroad, broaden the tax base, and generate additional revenues also in the future.
It is not yet known whether the tax amnesty has broadened the tax base by bringing new taxpayers into the net, but it is likely that most of those declaring assets are among the minority of Indonesians who are already listed taxpayers. As in earlier efforts to increase tax revenues, the amnesty seems to have been more of an exercise in tax intensification rather than in tax broadening.
Indonesia faces an ongoing challenge of reforming both tax policy and administration. This is no easy task. Indonesia’s tax administration has been notoriously weak and marred by corruption, despite repeated efforts at reform. Indonesia is estimated to collect less than half of its potential revenues. Tax policy itself appears relatively sensible, although there are key areas for improvement, such as an end to tax holidays and to the complex set of value-added tax (VAT) exemptions. Simpler tax regulations with few or no exemptions would be helpful: it would leave little room for discretionary decisions by tax assessors, increase predictability and transparency, and reduce compliance costs.
Tax administration needs more attention. Specific efficiency-enhancing reforms are called for such as a split between a service-oriented front office that collects taxes and a back office that carries out audits, which would make it easier both to collect taxes and to reduce corruption. At the same time, tax collection needs to be less costly to monitor. The government has introduced electronic filing for VAT and income tax and established a system of unique and permanent taxpayer IDs. Auditing should be based on compliance risks rather than being mandatory for all transactions, in order to economise on scarce auditing resources.
In addition, a new service-oriented attitude needs to be adopted, one that sees taxpayers as partners to be provided with valuable government services in return for their contributions. The current situation has been described by many as being burdened with mutual distrust between taxpayers and tax authorities as well as being hampered by very complex regulations and uncertainty over tax assessments. The success of the tax amnesty should not obscure this ultimately more important set of obstacles to effective taxation.
Restoring competitiveness also needs a more liberal trade and investment policy which would increase efficiency, competition and technology transfer and enhance growth. Liberalisation of agricultural imports in particular would potentially lift millions of people out of poverty. For example, the Indonesian rice price was more than 70 per cent higher than the Vietnamese in 2016, and the poor spend a quarter of their budget on rice, which could be much cheaper if the government agreed to liberalise trade. As it stands, the most vulnerable people pay the price for misconceived protectionism.
Natasha Hamilton-Hart is Professor of Asian Business at the University of Auckland, New Zealand and author of Hard Interests, Soft Illusions: Southeast Asia and American Power, published by Cornell University Press (2012).
Professor Günther Schulze holds the chair for International Economic Policy at the University of Freiburg, Germany and is Adjunct Professor at the Australian National University; he is a member of the Southeast Asian Studies Group at the University of Freiburg.