The Key to Improving Indonesia Tax Collection
Improving Indonesia’s tax collection should start with a renewed focus on the top 1%
The first term of Indonesia 2016 tax amnesty program is over. Albeit the controversies, confusions and glitches surrounding the program, the result is rather encouraging: some 360 thousand taxpayers participated, disclosing for the first time their holdings of assets worth over Rp3600 trillion ($278 billion) and paying Rp97 trillion ($7.4 billion) in penalties.
To put the achievement of the amnesty program in perspective consider this: in the ten years from 2005 to 2014, actual payment by individual taxpayers for all types of taxes amounted to Rp79.7 trillion which only slightly exceeded the Rp79.3 trillion paid by individual taxpayers in the first eleven weeks of the amnesty program. Truly astonishing achievement.
To no one’s surprise, though, the big taxpayers accounted for a disproportionately high share of the total asset disclosed and penalties paid. Data from the Directorate General of Taxation (DGT) shows that in the individual taxpayer segment 57,201 individuals or roughly 20% of the total participating individuals accounted for 94% of the total penalties and 88% of the total asset disclosed. More interestingly, perhaps, is the fact that less than 10,000 taxpayers or a mere 3% of the total participants paid close to 75% of the penalties and held almost two-third of the total asset disclosed.
The shocking inequality problem implied by these figures and how tax policy can change the situation is one of the defining issues of our time. This article, however, will focus on the tax collection aspect of the story especially related to the individual taxpayer segment and discuss what we can do to improve collection given that shameful fact of income and wealth concentration. Let’s also not forget that higher state revenue, wisely spent, should help in reducing that inequality.
DGT Special Units
The existence of a relatively small number of the largest taxpayers which contribute the bulk of tax revenue that now thanks to the amnesty program have come into the tax system should be fully leveraged by the DGT in order to achieve significantly improved compliance and gain a sustainable increase in revenue collection.
DGT’s own experience provides a powerful lesson on how to progress going forward.
As pointed out by the IMF, one of the most successful outcomes of the IMF-sponsored tax reform in late 2001 was the establishment of the Large Taxpayers Office (Kanwil LTO or Kanwil DJP Wajib Pajak Besar). The LTO not only produced faster revenue growth compared to other tax offices, but also served as the pilot project for new services and innovation such as e-filing and the use of Account Representative which would later became the standard and extended to all tax offices across the country. In AC Nielsen 2005 customer satisfaction survey, the LTO not only scored the highest among all tax offices in Indonesia but also achieved higher satisfaction rating than the international average.
In 2013, the number of registered taxpayers that were required to file their annual returns with the LTO totaled only 2,117 taxpayers or just 0.012% of the national figure of 17.7 million taxpayers. This tiny percentage however contributed 35.8% of the total Indonesia tax revenue that year. Combined with the Special Taxpayers Office (STO or Kanwil DJP Jakarta Khusus), which also serves a small number (13,635) of the largest taxpayers with distinct characteristics, the revenue collected from this two special offices accounted for 58.7% of the total revenue in 2013.
This history shows that a focus on large taxpayers pays off handsomely
Window of Opportunity
Now the amnesty program has opened up a new window of opportunity for the DGT to improve collection by pursuing the biggest taxpayers. The number of individual amnesty participants which paid more than Rp100 million in penalties were 57,201 individuals. On average these people held Rp48.5 billion in asset per person. Surely, any definition of a large taxpayer would include these 57,201 individuals which are also highly likely the owners of the biggest Indonesia businesses.
As soon as possible the DGT should mine the data submitted in the first term of the amnesty program and if verified put all 57,201 taxpayers under the care and supervision of the special large taxpayers units (LTO and STO). Recall that these special units as of the end of 2013 only handled roughly 16,000 taxpayers which also include thousands of corporations. Therefore the majority of the biggest participants in the amnesty are not yet registered under either the LTO or STO.
After placing them into the special units, the DGT should devote more of its resources to these units and expand the presence of their operations. In a 2002 report, the IMF observed that a strong and centralized large taxpayer unit with “limited organizational units” works best compared to decentralize operations. Nevertheless the current structure of the LTO which has only four offices all located in Jakarta should be reconsidered. A more recent report by the OECD commented that the LTOs should be expanded by “rolling out more of them across the country.” In this regard, a viable option would be to set up three more LTO field offices say in Medan for the Western Indonesia region, in Surabaya for the Central Indonesia region and in Makassar for the Eastern Indonesia region, to complement the four offices in Jakarta. As the OECD report makes clear all offices must ensure “that they implement a robust overall strategy in a consistent manner.” Therefore all seven LTO field offices would need to operate under the supervision of one large taxpayer regional office (Kanwil DJP WP Besar) in Jakarta.
A focus on the biggest taxpayers of course does not mean abandoning the smaller ones. This is just a matter of allocating scarce resources to their best use. Moreover, following the pattern set in the early days of the LTO piloting projects the large taxpayer segment serves as hotbed of innovation which will benefit all taxpayers. Most importantly, when smaller taxpayers perceived that the elite ones have got their tax affairs in order then they would very likely to follow suit hence improving general compliance.
Entirely up to the DGT
Without any doubt, the largest taxpayers will necessarily present the most challenging cases which will require deep technical expertise and sophisticated skills on the part of the tax officers. Therefore the DGT must substantially and continually upgrade the competency and capabilities of its personnel assigned in the special units and provide them with ample resources and support.
In closing, the DGT’s own history proved how a focus on the biggest of all taxpayers could produce huge benefit for tax collection. More recently, the focus on high-net-worth individuals in the first term of the amnesty program has reaped extraordinary results. It is plain then that going forward no other choice for the DGT but to re-focus its sparse resources on serving the large taxpayers segment for the benefit of the general public.
Most importantly, the whole matter depends entirely on the DGT and requires no new legislation or law from any other government agency or the legislative body. A simple letter from the head of the DGT will do: if today the Director General of Taxation decided that all taxpayers above a certain threshold would be administered by the DGT’s special units and that these units were granted substantial additional resources, then a major breakthrough would have been achieved in Indonesia’s new tax reform.
A version of this article titled “Taxes: Leveraging Inequality” was published as an opinion article in the Jakarta Post, 13 October 2016 .