High hopes for Jokowi to boost tax revenues

Indonesia has only met its tax revenue collection target two times in the past 10 years, but President Joko “Jokowi” Widodo has vowed to transfer his past success in boosting tax revenue at the regional level in Jakarta and Surakarta to the nationwide level.

Jokowi has laid out his plan to increase tax collection by Rp 600 trillion (US$48.27 billion) in his revised budget for next year, up from Rp 1.38 quadrillion in the 2015 State Budget, despite the underperformance of the Finance Ministry’s taxation office over the past few years.

As of November this year, the government had only managed to collect 75 percent of its annual tax revenue collection goal of Rp 1.07 quadrillion, with the shortfall amounting to a staggering Rp 260 trillion.

“Our goal next year is simple: meeting the tax revenue collection target,” Finance Minister Bambang Brodjonegoro said in an interview with The Jakarta Post.

“There needs to be stronger support from the President and the law enforcement agencies. We need to ensure that parties who are proven to be involved in tax evasion can be penalized in court,” he added.

Currently, high hopes are pinned on the President turning the situation around given his past success in boosting tax revenues at the regional level.

As Surakarta mayor, Jokowi succeeded in boosting locally generated revenues by 12.5 percent on an inflation-adjusted basis, twice Central Java’s average of 6.4 percent, while as Jakarta governor he increased revenue by 35.6 percent last year.

Jokowi is aiming to broaden the country’s tax base to 16 percent of gross domestic product (GDP) from the current 12 percent, which is among the lowest in the region, with Singapore at 14 percent and Malaysia and Thailand at 16 percent.

“Indonesia currently has a very large gap between actual and potential revenue,” the World Bank noted in its latest quarterly report. “A strong focus on revenue by the new government will be critical to create the fiscal space for implementing its development programs.”

As part of the government’s new reforms to boost state income, the Finance Ministry would oblige all local transactions exceeding Rp 100 million to include tax registration numbers (NPWP) beginning next year.

This month, Bambang also traveled to Singapore to strike a deal on the exchange of information to tackle cross-border tax evasion with the city state, which is known as a tax haven for Indonesia’s wealthy businesspeople.

“The challenge for the new director general of taxation is how to bring home the money stashed by Indonesians overseas in countries with low tax rates, such as Singapore and the Cayman Islands,” said Darussalam, a tax expert from the University of Indonesia. Deputy finance minister Mardiasmo has recently been appointed as acting director general of taxation.

Darussalam also noted the importance for the new government to stop relying on institutional taxes, suggesting they undertake reforms to boost individual taxes.

Individual taxes in Indonesia, a country with an active workforce exceeding 130 million people, only accounted for 0.4 percent of total taxes collected, a far cry from the 47 percent collected in the US, he said.

Indonesia’s economic slowdown, with GDP growth now hitting a five-year low of 5 percent, has been blamed for the sluggish collection of tax revenues but there are also mounting concerns over the loopholes in the country’s archaic taxation system.

The rigidity of civil service regulations, which is attributed to Government Regulation no. 53/2010 and Law no. 43/199 on civil service principals, has made it difficult for the taxation office to hire and fire workers and apply a carrot-and-stick system.

To address the issue, top officials from the Finance Ministry and the Coordinating Economic Ministry held a meeting on Dec. 24 in which they agreed to soon allow the taxation office to be more flexible in its organizational management, especially human resources, due to its crucial role in state revenues.