Tax Compliance & Enforcement in Indonesia Remain Troublesome

The current tax-to-GDP ratio of Indonesia is low at between 12 and 13 percent. This figure is not only low compared to developed countries (that usually have ratios of +25%), but also compared to its regional emerging peers. Indonesia is outperformed by Thailand (17.0 percent), Malaysia (15.5 percent), Philippines (14.4 percent), Singapore (14.2 percent), and Vietnam (13.8 percent). Emerging economies tend to have low tax-to-GDP ratios as the governments’ financial management is usually inadequate (and plagued by corruption).

It is alarming that Indonesia has not shown a marked improvement regarding the tax-to-GDP ratio in the past decade as tax income is necessary to finance the budget deficit, enhance infrastructure development, and improve healthcare, education as well as poverty eradication.

Tax compliance is extremely low in Indonesia. Rahmany said that there are more than 60 million Indonesians who should pay personal income taxes. However, only 40 percent (or 25 million) of them do in fact fulfil their tax obligation. Furthermore, he estimates that only 11 percent of total companies active in Indonesia (about five million) pay corporate taxes. Tax compliance is not only low because people are reluctant to pay taxes assuming that the money will end up in the pockets of tax officials instead of being used for the benefit of the country but also because the government is unable to force tax compliance. Rahmany cited weak coordination between government institutions as one reason. Furthermore, the country lacks a sufficient amount of tax officials. According to data from Indonesia’s General Tax Directorate (DJP) there were only 32,214 tax officials working in Indonesia in 2013. Considering that Indonesia’s total population numbers over 246 million people, it implies that there is one tax official per 7,636 Indonesians. This ratio is also much lower than in other (developed) countries. For example, in Germany there are approximately 110,000 tax officials in a population of about 80 million (1:727), or, in Japan there are 66,000 tax officials in a population of 120 million people (1:1,818). Possibly budget constraints are the main reason why the government cannot ‘invest’ in more tax officials. However, expanding the tax official force is required to improve the tax-to-GDP ratio toward the future.

President-elect Joko Widodo, who will assume office on 20 October 2014, said that he wants to raise the tax-to-GDP ratio to 16 percent during his leadership (2014-2019). It has been reported that Widodo may set up an autonomous taxation office (one with greater authority and which is separated from the Finance Ministry) as well as a more efficient bureaucracy to improve tax revenues.

The Indonesian government only managed to achieve its tax revenue target twice in the past decade. This year it lowered tax revenue target from an initial IDR 1,110.2 trillion (USD $94.9 billion) mentioned in the 2014 State Budget to IDR 1,072 trillion (USD $91.6 billion) in the revised 2014 State Budget.

Tax revenue (particularly corporate income tax) accounts for about 80 percent of total state income in Indonesia.