Indonesia’s tax amnesty isn’t cause for fiscal celebration just yet, Jonathan Farrar writes.
A soon-to-be completed tax amnesty in Indonesia has been hailed by some financial pundits as one of the most successful in the world. With a few weeks until completion, more than 700,000 taxpayers have participated, and the Indonesian government’s coffers have swelled by 107 trillion rupiahs (about US $8 billion). Although it is the largest tax amnesty in the history of tax amnesties, it may not be time to break out the bubbly just yet.
Tax amnesties are most often used by governments to increase short-term revenues, especially in situations of recession or financial crisis. Indonesia has had a ballooning fiscal deficit for years, prompting the current tax amnesty.
This amnesty encouraged Indonesian taxpayers to identify and report income-generating assets in Indonesia and abroad. Participating taxpayers were assessed with a tax rate on the fair market value of those assets (rather than the income that was generated on those assets). There was also an incentive for early participation in the amnesty: the sooner taxpayers participated, the smaller their tax rate.
On paper, this plan seems workable. One-time tax revenues are collected; tax authorities are spared the time and cost of detecting tax-dodgers through audits and other investigations; and tax authorities can identify taxpayers with domestic and offshore income-generating assets, thereby broadening the tax base and improving subsequent compliance.
However, despite the short-term revenue gain and subsequent increases in tax revenues, the success of a tax amnesty has to be weighed against its costs, and not just measured by the magnitude of the gross revenue gain.
In measuring success there are several costs to consider. Firstly, the direct costs of administering the amnesty, such as advertising costs and employee costs. Secondly, the forgone tax revenue – for example, the difference in tax revenue that would have been collected (once the tax administration had detected the income-generating assets) versus the reduced tax revenues collected during the amnesty. Finally, a possible reduction in tax compliance: if one tax amnesty is offered, taxpayers could expect another, and could be non-compliant in the meantime.
Granted, these costs are difficult to quantify. But the US $8 billion in revenue generated by this tax amnesty is a gross revenue gain, and is a misleading number if used to champion the success of this tax amnesty. The net revenue gain, which includes these costs, is far less than $8 billion, and may even be a net loss.
The fact that a government offers a tax amnesty is often a symptom of a more serious underlying problem: an incompetent tax administration. To say that Indonesia’s tax administration is incompetent is being polite: only about 10 per cent of Indonesia’s population of 260 million are registered as taxpayers, and, in 2014, of the registered taxpayers, less than 4 per cent paid what they owed. For perspective, that is about 1 compliant taxpayer for every 285 Indonesians. While not all Indonesians earn enough income to owe income taxes, there are still millions of Indonesians who should be paying income taxes.
Exacerbating the incompetence of Indonesia’s tax administration is a lack of human resources (Sigit Priadi Pramudito, former Director General of the Finance Ministry’s taxation office told the country’s parliament that at present they have only 37,000 employees but they need 62,000). Perhaps the resources devoted to planning and conducting the tax amnesty could have been put to better use hiring and training tax administration employees?
Will anything good come from the amnesty? The tax revenues collected are inconsequential at best, representing less than 1 per cent of Indonesia’s GDP. Any increased compliance is doubtful, as the tax administration infrastructure and human resources cannot very well support or enforce compliance activities.
But perhaps the amnesty may signal to Indonesians that the current government views tax compliance as an objective of national importance. The fact that this amnesty was the first-ever successful tax amnesty in Indonesia (after two failed amnesty attempts in 1964 and 1984) may lend credence to this suggestion. Furthermore, President Jokowi Widodo, who appeared on national television to promote the amnesty, may further legitimise the current tax administration with his perceived support.
It is up to Indonesia’s tax administration leadership to capitalise on this momentum, however slight.