Indonesia is now in the third phase of its tax amnesty program, which was launched initially in July 2016. The program aims to increase the country’s meager revenue by recovering previously unreported money hidden by wealthy citizens both abroad and at home.
More than 600,000 taxpayers have so far joined the scheme. The first two phases generated US$8 billion.
The first phase ended in October 2016 and exceeded expectations by generating US$7 billion, or two-thirds of the revenue goal. The second reporting period, which ended on December 31, 2016, generated US$1 Billion.
Since the launch of the program, 27,000 additional taxpayers have been registered. While it is yet to be determined whether Indonesia will achieve its US$12.4-billion tax amnesty goal by the end of the third phase in March 2017, the success of the program’s first phase has led financial analysts to hail it as one of the most successful in the world.
Exceeding expectations
The IMF was among those who were initially skeptical about Indonesia’s ability to generate significant revenues from the amnesty. The program’s success has dispelled any doubts.
The revenue generated by Indonesia is much higher than other countries that have implemented similar programs, such as India, Greece, Germany, and Canada.
The low tax rate was one of the main reasons why many Indonesians reported their assets. In the first phase, the government charged only 2% of the total financial assets reported within Indonesia and 4% abroad. In subsequent steps, the rate will increase incrementally until it reaches 10% for offshore assets in the third phase.
The OECD criticized Indonesia for its low tax rates, claiming that they were too generous to tax evaders. Protested in Jakarta against the tax amnesty program. They complained that it forgives wealthy tax cheaters.
The local finance ministry believes that the low rates are the driving force behind the rapid uptake of this program.
Additional incentives
Indonesian authorities ignore the source of funds reported to make sure taxpayers benefit from the scheme. It ignores the false reports of total assets made in previous years and promises confidentiality to those who take part in the amnesty scheme.
Indonesian union workers protested the tax amnesty of the government on September 29, 2016. Darren Whiteside/Reuters
Some wealthy businessmen, such as James Riady, CEO of Lippo Group James Riady has openly declared his participation and called on others to declare their assets too.
Indonesia’s amnesty tax program is timely. By September 2017, Indonesia will begin exchanging information about its tax system with other countries that are part of OECD’s Automatic Exchange of Information Initiative. The country will begin receiving information from other tax jurisdictions about the offshore assets of its residents. As of July 2016, 102 tax jurisdictions have signed up for the program.
This initiative will make it difficult for tax avoiders to conceal their financial data from the authorities, as banks will not be able to hide information on their non-resident clients.
The Final Period
In the third period of his tenure, Finance Minister Sri Mulyani is expecting small and medium enterprises to contribute significantly to tax revenues.
The majority of those who took advantage of the amnesty program in its first phase were wealthy individuals with offshore assets. However, 70% of taxpayers that reported during the second round of tax amnesty are small and medium-sized businesses.
The businesses in this second phase contributed ten times as much revenue to the first phase.
This last round of reporting is crucial to the success of the program. The Finance Minister should work with the Ministry of Cooperatives and Small and Medium Enterprises in order to obtain the list of companies and to require them to declare their assets.
Tax base expansion
The tax amnesty program has been a success so far and is a positive step in increasing Indonesia’s revenue. If Indonesia wants to raise its tax revenue, it needs to find a way of aggressively expanding its tax base.
This low number has contributed to the country’s budget deficit, which is expected to reach a href= “http://economy.okezone.com/read/2016/10/26/20/1525234/defisit-rp330-triliun-pemerintahcari utanghinggainvestasi”>US$25 billion in 2017/a> or 2.41% of total GDP. This low number contributed to Indonesia’s budget deficit, which is expected to reach US$25 Billion in 2017, or approximately 2.4% of GDP.
It is still necessary for the government to educate people about tax compliance. It could, for example, link tax compliance to religious and moral concepts. Religion is a major part of Indonesian culture. Religion could influence the habits of people and make them less likely to commit tax evasion.
A study found that tax morale is positively correlated with religion in Spain and the United States. This relationship could also be seen in Indonesia.
