Tax Administration Reform and Fiscal Adjustment: The Case of Indonesia(2001-07)

Abstract

This paper should not be reported as representing the views of the IMF. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Tax administration reforms can play an important role in fiscal adjustment. This role is examined by reviewing Indonesia's tax reform cum fiscal adjustment experience since 2001. The paper describes Indonesia's fiscal adjustment strategy, its tax administration reforms, and assesses the impact of these reforms on fiscal adjustment. Evidence suggests tax administration improvements had a strong positive impact on the tax yield and a positive effect on the investment climate. Lessons are presented for designing tax administration reforms within the context of a fiscal adjustment program and reform priorities are identified for Indonesia's ongoing efforts to strengthen tax administration.

Family Matters: Demographic Change and Social Spending in Indonesia

“…The income tax and VAT ratios to GDP, which are in the range of less than 5%, are too low in comparison with their respective statutory rates (25% for corporate income taxes and 10% for VAT). The poor performance of income and VAT revenues may be due to high levels of informality (Andrews, Caldera Sánchez, and Johanson 2011), in addition to underlying problems related to tax policy and its administration (Brondolo et al 2008).…”

Tax Reform and Noncompliance in Indonesia

“…Prior to the reforms, several weaknesses in the tax administration were identified in the following areas: tax collection, the tax system, legal and governance frameworks, organizational and staffing arrangements, enforcement and taxpayer service programs, and management information systems (Brondolo et al, 2008). Supported by the International Monetary Fund (IMF), reform initiatives were formulated and aimed at dealing with these factors.…”

“…Moreover, the organizational design of the headquarters was generally not effective for managing ongoing operations and engaging in continuous reforms. The inadequate number of staff was also identified as one of the factors contributing to the DGT's poor performance in tax collection (Brondolo et al, 2008).…”

“…On one side, the tax authority lacked many powers common to modern tax agencies, such as a strong penalty regime, access to taxpayers' records and key powers to collect tax arrears. On the other side, taxpayers lacked some basic protections, such as the easy processing of refunds, consistent tax assessments and unbiased treatment in the objection and appeal processes (Brondolo et al, 2008). Several reform initiatives were formulated to address these issues, such as increased penalties, a faster refund process for compliant taxpayers and course requirements for tax officers so that they can improve their services to taxpayers.…”

“…The tax reform of 2000 was deemed necessary due to the Indonesian tax authority's (Directorate General of Taxes/DGT) many deficiencies in critical aspects, which resulted in high levels of noncompliance, foregone tax revenues and increases in the cost of doing business in the country. Moreover, the poor tax administration might pose as a fundamental barrier to effective and fair taxation, as well as hinder the efforts to build wider trust between the government and its citizens (Brondolo, Silvani, Le Borgne, & Bosch, 2008).…”