The low level of public trust in the transparency and accountability of the government’s taxation system, as revealed by Tempo Media Group and CITA tax consulting company through a recent survey, only confirms the vital importance of good governance in enhancing voluntary tax compliance (VTC) or tax culture.
Similar surveys in many other countries have also discovered that public trust in their government is most important in tax compliance, which in turn determines the taxpayer base and consequently the tax to gross domestic product ratio.
VTC is the key to increasing the taxpayer base because the tax authority would never have enough auditors to examine or audit the many taxpayers. It would be grossly inefficient to audit even a mere 5 percent of the total number of taxpayers, given the large number of individual and institutional or corporate taxpayers.
In the United States, for example, average tax audit covers only 0.6 percent of the total taxpayers but the VTC rate is quite high at 88 percent, according to the latest Internal Revenue Service (IRS) survey. The efficiency, integrity and competence of the IRS in enforcing tax laws make cheating extremely hard, but public trust in the public sector’s governance also plays a crucial role.
Certainly the situation in Indonesia is strikingly different because the government is perceived to be utterly corrupt and the integrity and technical competence of the tax authority are quite inadequate. The cascading impact of both factors has made the rate of VTC extremely low.
Consequently, the tax ratio has remained under 11 percent, demonstrating that tax evasion is quite extensive. Even the World Bank estimates that Indonesia collects only 50 percent of its tax potential.
Even though the top tax rate for individual taxpayers is 30 percent — lower than in many other ASEAN countries — the contribution of nonemployee individual taxpayers (such as entrepreneurs and professionals ) to total 2018 tax revenue was only 0.7 percent of total tax revenues, compared to 10.7 percent from employee taxpayers (withheld by employers).
Only 65.4 percent of the 16.3 million registered individual taxpayers filed 2017 income tax returns by the March 31, 2018 deadline, reflecting a persistently low VTC. Yet more disappointing is that only 992,000 of the 10.6 million who filed tax returns were self-employed professionals such as doctors, consultants, lawyers and businesspeople, while the other 9.6 million were paid employees whose income taxes were withheld by their employers.
This means that only about 40 percent of registered self-employed individual taxpayers filed tax returns for 2017. The low individual income tax return filings also reflect a low tax culture, low VTC and even suspected widespread tax evasion, notably among highly paid professionals and high net-worth individuals (wealthy people).
Hence, the VTC rate must be increased by improving the quality of public sector governance along with the integrity and technical competence of the tax authority to enforce tax laws.