In the lead-up to Indonesia’s presidential elections scheduled for February 14, the three main contenders are advocating for tax reform as a means to enhance government revenue. The central proposal involves the creation of a new tax collection agency. Despite skepticism from the tax and business community, the candidates are emphasizing the potential of this approach to address the longstanding issue of weak revenue collection in Southeast Asia’s largest economy.
Current Fiscal Landscape and Presidential Pledges
Under President Joko Widodo’s decade-long tenure, Indonesia has demonstrated effective financial management. However, the country faces limitations in spending capacity due to factors such as a deficit ceiling, significant outlays on energy subsidies, and increasing interest payments on debt. All three presidential candidates have committed to transferring responsibility for the tax department from the finance ministry to the president.
Defense Minister Prabowo Subianto, leading in recent opinion surveys, has set an ambitious tax-to-GDP target of 18%, aiming for approximately $100 billion in additional tax revenue if elected. In addition to this, he has promised personal income tax cuts. Prabowo’s team envisions that establishing a new agency will strengthen tax authorities and improve their capacity to investigate evasion cases.
Former Jakarta Governor Anies Baswedan has proposed tax cuts for the middle class and an increase for the wealthy, with a target tax ratio of 13%-16% of GDP. Anies advocates for the supervision of these changes under a new agency, drawing inspiration from the U.S. Internal Revenue Service.
Meanwhile, ex-Central Java Governor Ganjar Pranowo aims to double Indonesia’s current budget of $216 billion. His strategy involves cracking down on tax evasion through tougher law enforcement and the implementation of a digital tax collection system under a newly established agency.
Doubts Surrounding the Efficacy of a New Agency
Despite the candidates’ focus on a new tax agency, economists and business leaders express reservations about its potential impact on revenue. Critics argue that addressing fundamental issues, such as the low tax base, is crucial for realizing significant improvements. Researchers suggest considering new taxes, like those on carbon emissions or inheritance, and emphasize the need to strengthen rules for taxes on small businesses.
The World Bank notes that administrative independence alone may not guarantee improved performance in revenue collection. It suggests alternative measures, including tightening rules for small businesses and enhancing compliance databases, to overcome potential constraints.
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Fajry Akbar from the Center for Indonesia Taxation Analysis (CITA) questions the necessity of creating a new institution, advocating for existing solutions such as digitization and a larger workforce of tax collectors. Akbar argues that establishing a new agency would be time-consuming and costly, considering the already available, more straightforward alternatives.
Tutum Rahanta, an official with Indonesia’s retailers association, highlights the importance of fair interactions between tax officers and taxpayers. He stresses that addressing the perceptions surrounding tax cases and ensuring fairness in dealings will be essential for the proposed new agency to achieve its objectives.
