Non Taxable Income Reformulation and High Tax Ratio Dream

“In terms of quantity, we need more employees. In terms of quality… How qualified are we?”

That statement was declared by ex-Director General of Taxation (DGT), Fuad Rahmany, in the mid of 2012, as a response to the tax revenue achievement trend that is still far from the expectation. Fuad’s statement that is also a question has portrayed the capacity of Directorate General of Taxes (DGT) that seems still insufficient to reach the high revenue target. 

In the last 10 (ten) years, the Indonesian Government has just once succeeded in reaching the tax revenue target. And, it was because of sunset policy program that has successfully contributed 15.2% of tax revenue surplus in fiscal year 2008. A few years later, the realization of tax revenue has been always lower compared to the target. It has made the tax ratio over gross domestic product (tax ratio) shrink from 13.3% in year 2008 to 10.3% by the end of 2016. 

This year’s fiscal performance–even though it has been supported by tax amnesty program–is not free from the risk of missing tax revenue target (shortfall). The problem is that based on the data released by DGT, tax contribution to the state treasury until the end of July 2017 has only reached IDR601.1 trillion or 46.8% from the targeted amount at IDR1,283.57 trilion. It is surely not an easy case for DGT to collect taxes of IDR682.47 trillion within the remaining five months. 

The issues is now shifting. It is no longer about the limited capacity of DGT in collecting taxes, but it is more about the erosion of tax base that is getting worse and has dragged down the Indonesian tax ratio even deeper. 

Miscalculation 

In some occasions, the government considered that the low tax ratio in Indonesia when compared to the neighboring countries is only due to difference in the calculation. All this time, Indonesia has been calculating the tax ratio only from the tax revenue obtained by the central government. In some countries, the tax ratio calculation considers all of the contributories paid by public, from royalty, social security, to regional taxes.  

The result will surely be different if the calculation of tax ratio in Indonesia uses the international best practice. This may be the reason behind the Finance Minister Sri Mulyani Indrawati’s promising a tax ratio that will reach 16% in 2019. Many assume that the tax target is too ambitious and may give rise to serious impacts to Indonesian economic stability if being urged. 

We can conclude that it is actually just a matter of wrong calculation formula that was used. A mistake that was long ignored and is just disputed or recognized in these recent years. 

If it is that simple, the solution is supposed to be easy. The government, the parliament, and other interested parties only have to sit together to refine the tax ratio calculation formula. 

In reality, it is not that simple. Things are just too complicated when speaking of Indonesian taxes. Not to mention political seasonings which is too caustic and mostly raises complication to the solution. Too many interests that make many things are mostly neglected instead. 

Purchasing Power Dilemma

Then, the government comes with the idea to adjust the amount of Non Taxable Income (PTKP) using the Province Minimum Wage (Upah Minimum Provinsi/UMP) as a reference. The agenda of the implementation of PTKP with provincial zoning arises after PTKP, which has increased twice in the last two years, is considered grinding the tax base significantly. 

In 2015, the government increased the limit of PTKP, from IDR24.3 million per annum to IDR36 million per annum. The amount of PTKP then increased again in 2016 to IDR54 million per annum. Based on the assessment of DGT, as a result of these increasing PTKPs within the last two years, the number of Individual Taxpayers whose income under PTKP has increased to 3.6 million people. Consequently, Income Tax contribution decreased substantially. 

To note, there was no public demand to increase the amount of PTKP when the policy was issued. The Government’s reason at that time is purely to increase people purchasing power in which the positive effect gives way to the increase of revenue from Value Added Tax (VAT). In other words, the potential loss of Income Tax should be compensated by the increasing VAT contribution. 

Like money, which is supposed to come from the right side pocket but it comes from the left side instead. This is only about government’s preference, whether to maximize the source of income from Income Tax or from VAT. Ideally, any tax collection can surely be maximized. 

Say that the PTKP policy with zoning system may get back the 3.6 million of Taxpayers, which have once been eliminated, to pay the Income Tax again. As well as, increase the tax base as the effects from the number of new Taxpayers that raise. 

At glance, the argumentation seems a big and fair deal, since the PTKP is determined by considering the living cost of different Taxpayers in each region. However, it is ideal as well if only using UMP, which is lower than PTKP, as the base. 

It is important to take into account that historically the PTKP has never been reduced in Indonesia. Once it will, it should consider the negative impacts of the decreasing people purchasing power as well as the risks of decreasing revenue from VAT, not including political and social effects that will certainly drain the energy. 

The determination of PTKP under family condition (continuing exemption) applied so far in Indonesia has been adequate. It will surely be better if the taxpayer’s living cost is calculated in the determination of PTKP. However, it seems less accurate if using the UMP as reference, since the administration will be very burdensome for the tax withholders as well as the tax officers if the taxpayers shall move into another domicile.  

To Keep the Consistency 

Basically, PTKP is a manifestation of equality and equity principle, where tax applies equally for every Taxpayer and fairly for a certain case. It is a mandate of Article 6 paragraph (3) of Income Tax Law that states: “the Individual Resident Taxpayer is given deduction in the form of Non Taxable Income...”

It is legitimate for the government if intending to reformulate the tax ratio and PTKP, as long as not forgetting the most essentials—Starting from the low compliance level of taxpayer, the high level tax avoidance acts, the outdated tax system and administration, to the DJP resources that is limited. 

Further, it is not about being optimistic or pessimistic, by considering the current state, what more precise is that the government acts realistically. Especially amidst the economic uncertainty that demands a consistent policy.***

*Short version of this article has been published in Daily Bisnis Indonesia, Thursday, August 24, 2017. 

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.