Indonesians struggle with the tax man

By Elizabeth Pisani
828 words
28 July 1989
Reuters News
(c) 1989 Reuters Limited

JAKARTA, July 28, Reuter – The Indonesian government is using patriotism and penalties to induce a reluctant populace to pay income tax, but the virtuous few who do pay are still only a tiny part of the workforce.

"Until very recently tax evasion rated right up there with badminton as the number one national sport," said one foreign tax consultant.

Bold changes in the law have swelled government tax coffers but the tax base is still narrow with much of the money raked in from foreign firms.

Experts fear that if Jakarta goes on pumping virtuous taxpayers for more money instead of looking for new sources, it will be not meet ambitious long-term tax collection targets.

"They’re squeezing the golden goose, and sooner or later it will stop laying," said one economist. And as an afterthought: "Only it’s not a golden goose, it’s just a chicken, and the only way to get more eggs is to buy more chickens."

Of a workforce of 75 million, only 672,000 Indonesians registered as taxpayers in 1987, the most recent figures show. And of those, only 64 per cent actually filed a tax return.

But even that is twice as many as were registered in 1983, before the first major overhaul of the tax laws.

The government has made payment a high-profile issue and a mark of patriotism. The Finance Ministry last week awarded certificates of merit to the 150 largest taxpayers — of whom some 30 per cent were foreigners.

There are fears that some of the biggest fish are slipping through the net. While foreign managers figured on the list, some of the wealthy Indonesians who employ them were not mentioned.

Smaller Indonesian firms have begun filing tax returns because the chances of their being caught not paying, and so getting stuck for fines up to 400 per cent of their total liability, are increasing by the day.

Value-added tax has from April 1 been slapped on to a vast range of services as well as wholesale goods. This boosts the amount coming into the treasury, but it also throws the tax net over a whole new range of companies, leaving them open to cross-checking and audit.

"People complain about the new VAT because they don’t like paying the 10 per cent extra, but the real sting is in income detection," a tax consultant said.

Companies wanting to be listed on Jakarta’s infant stock market have to look to their books, too. Any firm hoping to go public has to show a profit on properly audited accounts over the past three years.

"But as you can imagine, there are auditors and auditors," a consultant said. He and many others complain of miserably unprofessional standards in bookeeping and audit.

Undereducated or just plain corrupt staff in tax offices are another damper for potential taxpayers, despite efforts to shuffle staff around, breaking up comfortable fiefdoms.

"I have clients who have been asked for bribes just to register as taxpayers," one tax specialist said. "It’s not only more expensive to be honest, it’s a lot more hassle."

Tax collection figures can be misleading. Consultants say targets are handed out to regional offices more or less arbitrarily. According to one consultant, inspectors assess high profile taxpayers for huge amounts just before the end of the financial year in March.

"The companies get mad. They are told don’t worry, file a complaint and we will refund your money. But on April 1, that inspector has made his target and his boss is happy."

Despite these administrative flaws, Indonesia’s tax law is considered generally fair. There are few exemptions, and no easy tax breaks for new investors.

"Multinationals complain about not getting tax breaks, but it’s a good clean law with a top rate at 35 per cent. That’s not bad," said an international financial source. "Of course these companies have been used to getting away with murder."

Certainly, the treasury has seen results. Indonesia budgeted for a 33 per cent hike in tax income in the year to April, 1989. Despite scepticism from all and sundry, including the World Bank, it made it. This year, it budgeted for a 27 per cent increase, and it looks like it will achieve that too.

"The easy money comes up front, when you are making big percentages on a very small base," commented an economist. In its current five year plan, which runs through March, 1994, Jakarta plans to rack up an increase of over 20 per cent every year.

"Can it go on growing at those rates? It doesn’t matter. They don’t really need that much, and they won’t get that much. What is important is that those high targets are sending signals that the government is more serious than ever before about making Indonesians pay their dues," an economist said.

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