Indonesia’s presidential contenders promise tax reform to boost revenue

JAKARTA (Reuters) – The three main candidates contesting Indonesia’s presidential elections this month are proposing to bolster government coffers by creating a new tax collection agency, despite scepticism from the tax and business community.

Policymakers in Southeast Asia’s largest economy have long considered the creation of a more powerful tax institution to tackle the problem of chronically weak revenue collection, even as they have failed to address simpler solutions such as widening the tax base.

Indonesia has managed its finances relatively well during President Joko Widodo’s 10-year tenure, but its spending capacity is limited by a deficit ceiling, large outlays on energy subsidies and growing interest payments on debt.

Indonesia votes for a new president on Feb. 14 and all three candidates have pledged to shift responsibility for the tax department from the finance ministry to the president.

The latest opinion surveys have Defence Minister Prabowo Subianto leading the race for president with a substantial margin, ahead of former provincial governors Ganjar Pranowo and Anies Baswedan.

Prabowo has set the highest tax-to-GDP target of 18%, or about $100 billion in additional tax revenue, if he wins the presidency, while also promising personal income tax cuts.

“A new agency will make tax authorities stronger, more integrated,” said Drajad Wibowo, an economist with Prabowo’s team, adding that this could improve officers’ capacity to investigate evasion cases.

Former Jakarta Governor Anies has pledged to cut taxes for the middle class and raise them for the rich, putting a target of tax ratio at 13%-16% of GDP.

He also wants this done under the supervision of a new agency, modelled after the U.S. Internal Revenue Service, said his economist Wijayanto Samirin.

Ex-Central Java Governor Ganjar Pranowo has promised to double the size of Indonesia’s budget, currently at $216 billion, by cracking down on tax evasion with tougher law enforcement and the creation of a digital tax collection system under a new agency.

NEW AGENCY NOT ENOUGH

However, some economists and the business community say a new tax agency might not lead to higher revenue if other issues like the low tax base are not addressed.

Jahen Rezki, a researcher with University of Indonesia, said the next government should consider levying new taxes, such as on carbon emissions or inheritance.

The World Bank said the independence of a tax authority did not guarantee better performance, though it had not assessed the merits of such an institution in Indonesia.

“There may be more binding constraints to revenue collection than administrative independence of the tax authority,” the multinational lender told Reuters.

It has suggested the government could toughen rules on taxes for small businesses and strengthen its database for compliance.

Fajry Akbar, a researcher with think tank Center for Indonesia Taxation Analysis (CITA), said the creation of a new institution was unnecessary when easier solutions were already implemented, such as digitisation and having a bigger workforce of tax collectors.

“That is why creating institution will be a waste of time and it will be costly,” he said.

Tutum Rahanta, an official with Indonesia’s retailers association, said the proposed new agency would achieve nothing without change in the way tax officers interact with taxpayers to encourage people to declare their incomes.

“Tax officers should be fair … Sometimes between us and them, we can have different perception (about tax cases). Instead of straightening them out, they make this into some sort of extortion case,” he said.

($1 = 15,670.0000 rupiah)

(Reporting by Stefanno Sulaiman; Editing by Stephen Coates)