The Wrong Time to Increase Taxes
The government's plan to revise the General Taxation System Law is proposed at the wrong time. The government should cut spending rather than trying to increase tax revenues.
THE government and the House of Representatives (DPR) should not force through the revision to the General Taxation System Law this year. With the current economic uncertainty, the government must be realistic: this is not the right time to be trying to increase tax revenues. If this is forced through, rather than recovering, our economy could collapse.
The plan for the fifth revision to Law No. 6/1983 on general provisions of taxation procedures was sent to the DPR last week. Included in the 2020 National Legislation Program, all that remains is for the bill to be discussed by the government and the DPR. In the bill, the government wants to apply multi-tariff value added tax and increase personal income tax. This is all to increase revenues.
As well as this, although it is not explicitly stated in the bill, the government has also promised a ‘tax amnesty’ for those who did not participate in the same program five years ago. This plan was put forward by Coordinating Minister for the Economy Airlangga Hartarto, who seems to be passing on the aspirations from businesspeople who have been keen on expressing this from the outset. There are reports that the finance ministry is not very comfortable with this plan.
The lack of unanimity from the government over this program as well as over the procedures for the second tax amnesty provide more reasons for delaying the deliberations. The bill aimed at improving Indonesia’s tax ratio must not turn into a vehicle for the interests of a small number of tycoons.
It must be admitted that our tax ratio now is low. In 2020, it was only 8.3 percent of the GDP. This is clearly concerning because countries with strong economies in general have high tax ratios. However, we should realize that the fall in the tax ratio last year was mostly triggered by our worsening economic performance. Economic growth has been negative for the last three quarters—although the trend is now positive. The fall in tax revenues led to dramatic reduction in government income. It is predicted that this year will not see a full recovery.
Given this fall in income, the government should save money by allocating funding only to priority sectors. For example, the plan by the ministry of defense to procure primary weapon systems should be postponed. So should the plan to build a new capital in East Kalimantan. President Joko Widodo must be at the forefront of efforts to tighten budgetary discipline. He must not be swayed by the idea of increasing growth through large-scale spending. If state funds are used up buying imported goods—such as weapons, submarines and fighter planes—those large spending would not affect economic growth.
In the future, tax reforms should still be a priority. But beforehand, the government must build a tax system trusted by businesspeople and citizens alike. The recent tax embezzlement cases uncovered by the Corruption Eradication Commission (KPK) must not be repeated. Tax officials such as Angin Prayitno Aji, who is now a KPK suspect, must immediately be dismissed.
In order to drive economic growth, President Jokowi has another option. The government could pass more business friendly policies by simplifying the permit process and eradicating bribery and other corrupt practices. Rather than insisting on gathering taxes, the government should ensure that money continues to circulate in the economy. This way, we hope that businesspeople will be able to breathe easier and move more quickly to bring about economic recovery.