TAX REFORM IN INDONESIA

by SUHARTONO

Backgrounds
In 2005, Indonesian tax reform aimed to strengthen the fiscal
sustainability both in transition period and long-term periods.
The biggest proportion of revenue in Indonesian state budget
was tax revenue (69%), so the tax reform must be conducted by
considering :
As a developing country
Tax condition compared to other countries (tax revenue/GDP)
After crises 1998
To gain the aims, government actually has 2 main ways :
effectively mobilizing revenue and efficiency of expenditure

Challenges
Why assuring fiscal sustainability was very challenging?
Falling in oil and gas revenues (10% in 2000, 3.2% in 2004)
Commitment to lessen the budget reliance on foreign debt
On going decentralization process means larger government
expenditures
Recovery from crises
The chosen ways to increase tax revenue were
Increasing the rates - No
Increasing the capacity of tax administration -OK
Expanding the tax based -OK

Why??
Why administration and tax base?
Non oil and gas tax revenue ratio (11.9%) is relatively low compared to
other similar countries (Pakistan 14%, Thailand 16.5%, Malaysia 18.5%)
The filing ratio for three main taxes (Individual Income Tax, Commercial
Income tax, and VAT) is relatively low
Realization of all types of taxes is below the potential (showed by
Administration Efficiency Ratio (AER)) it means not only the amount
of tax payers, but also many tax payers do not pay the required amount.
The distribution of tax revenue is concentrated on to few tax payers.
Why not tax rates?
The big problem is in tax avoidance
Considering business competitiveness perspective
It is politically harder to be realized

Indonesian Tax System - Modern

Since economic crises, Income Tax has dominated tax
revenue stucture progresive
Dependence on oil and gas tax has been reduced (80% in
early 1890s to 10-20% in 2005)
Dependence on international trade tax
Equity on tax policy has been adressed (Income Tax rate
is progressive and VAT rate is proportional)

Increasing VAT
Single rate
Expanding tax base (mining and hotels)
Reducing exemptions for goods, except basic & strategic goods
(agriculture)
Its ratio to GDP is increasing by 5.7%

Increasing Income Tax

Personal Income Tax
5 bracket progressive rates (5% to 35%)
In 2002, 21 million taxpayers claimed in the lowest taxable bracket. (210
million citizen)
Personal Income Tax
Potential : 6% of GDP
Collected : 2.6% of GDP
It means that only 42 % can be collected.
Corporate Income Tax
3 bracket progressive rates (5%, 15%, 30%)
The highest bracket is similar to China and Thailand, but higher than
Singapore (24.5%) and Malaysia (28%)
Indonesia has many non-incorporated small businesses that are unregistered

Conclusion
52% Income Tax should be collected.
Unregistered taxpayers
No need to increase rates incentives for corporates (profit)
Improving tax administration:
Registration, filing, and auditing
to catch uncollected potential tax revenues (PIT and CIT)
Expanding tax base (VAT)

Conclusion -Reality
Extending potential tax payers:
Adding extensification section at each tax office
Using tax spies
Policy: Sunset Policy - in 2008 only
Taxpayers who submit unpaid taxes before 2008 will
not be fined.

Thank You