Questioning the Expansion of the Tax Base: Reducing VAT Threshold vs MSME Final Income Tax

Karsino Miarso, Monday, 13 September 2021

Questioning the Expansion of the Tax Base: Reducing VAT Threshold vs MSME Final Income Tax

Indonesia's tax revenue in 2021 is targeted at IDR 1,229.6 trillion and in 2022 it is planned to be IDR 1,262.9 trillion. The realization, until July 2021 tax revenues, has only reached 52 percent or IDR 647.7 trillion. It is highly probable that the target will be missed again as in previous years (shortfall).

Many factors cause tax revenues to always fall short of expectations. The biggest factor that has impacted tax revenue in the last two years is of course the coronavirus pandemic which has triggered a multidimensional (health, social and economic) crisis.

However, with or without a crisis, tax shortfall is actually a classic problem of managing the state budget since decades ago.

Economic growth and global trade conditions are usually macro indicators that naturally affect each country's tax payments.

In the case of Indonesia, the nation will always be faced with the problem of low compliance and tax base. The indicator, the ratio of tax revenue (tax ratio) and elasticity of tax revenue (tax bouyancy) which instead of improving, tends to decrease in the last decade.

This phenomenon shows that the elasticity and sensitivity of tax revenues to economic conditions are declining.

The government, in this case, the Directorate General of Taxes (DGT), does not mean that they do nothing to overcome these problems. A series of long-volume tax reforms is proof that the government is not standing still.

The reforms ranged from improving the quality of services and audits, improving the administrative system, to providing various incentives and even amnesty for taxpayers (from sunset policy to tax amnesty).

The results are positive. The number of taxpayers is surging, compliance rates are increasing, and the nominal state revenue is also growing every year.

However, none of these things have been effective enough to overcome the problem of tax revenue which is getting further from the target.

In response to the Covid-19 pandemic, the government has provided various fiscal incentives and social assistance. This policy should be appreciated despite the fact that it clearly adds to the burden of achieving the tax revenue target this year and possibly for the next few years.

Questioning VAT Threshold

The World Bank in its report entitled Indonesia Economics Prospect June 2021 edition offers a number of recipes to overcoming the "comorbid" of Indonesian taxation.

One of the recipes is cutting the business circulation threshold of VAT-Registered persons, which has been pegged at IDR 4.8 billion a year.

In general, VAT-Registered persons with a turnover of more than IDR 4.8 billion a year are obliged to pay 10% VAT for domestic transactions, according to the latest regulations.

This provision also stipulates that entrepreneurs with a turnover of up to IDR 4.8 billion are still classified as Small Entrepreneurs who are not burdened with the obligation to collect and pay VAT on their sales.

The threshold has also been used as the basis for defining the criteria for Micro, Small, and Medium Enterprises (MSMEs) that are required to pay a final Income Tax (PPh) of 0.5 percent.

The World Bank considers that the high turnover limit is one of the obstacles to the expansion of the tax base and narrows the scope of taxation in Indonesia.

This is a reasonable point of view, especially in the midst of the government's efforts to explore the potential for revenue from economic sectors that have not been touched by the tax system (underground economy).

When compared to other countries, such as the European Union which since July 2021 has set a VAT threshold of 10,000 euros — equivalent to around IDR 170 million using today's exchange rate — the figure of IDR 4.8 billion is considered too high.

However, there is a dilemma, if the threshold is cut just like that, especially when dealing with the development of MSMEs in Indonesia.

Tax Justice for MSMEs

One of the sectors of the economy that is on the rise and becomes the target of taxation is the digital industry. This is characterized by the increasing number of electronic buying and selling transactions — widely known as online selling— most of which are MSMEs.

Although it looks fragile, MSMEs are the business sector that contributes the most to national GDP (more than 60 percent) and is the key to Indonesia's economic recovery during the crisis. Surely, it is tempting to be the target of tax expansion.

However, as we know, MSMEs are like babies who are learning to grow. They can go fast or conversely at risk of falling if there is no one to support and accompany him.

Therefore, support is needed to help the growth of national MSMEs — not global start-ups.

So far, entrepreneurs with gross revenue of IDR 4.8 billion a year are immediately subject to final income tax of 0.5 percent from business circulation, even though their profits may still be below non-taxable income (PTKP).

In fact, if we talk about threshold or turnover below IDR 4.8 billion, it is actually more targeted at individual taxpayers.

Therefore, it would be better if the VAT threshold cut was balanced with other policies which more accurately reflect justice so as not to kill MSMEs. A number of policies can be done for that.

First, the effective VAT rate for MSMEs should be around 0.5 percent or 1 percent of the selling price. This will significantly alleviate the economic burden on households and MSMEs.

Second, there is no need for a final income tax policy of 0.5 percent for MSMEs, considering that its application so far does not consider non-taxable income.

Logically, most MSME actors in Indonesia are private individuals whose net income is below non-taxable income.

Meanwhile, non-MSME business actors with gross revenue above the threshold are still subject to income tax and VAT at normal rates, and are required to do bookkeeping.

This means that income tax is imposed on net income, while VAT uses the normal mechanism that includes output tax and input tax.

What about the MSME actors with legal entities who will also take advantage of the final income tax exemption?

Actually, it's still quite fair. Think of it as a tax incentive replaced by a VAT payment.

There is still room for the government to consider it given that current discussions on the revision of tax laws using the omnibus law scheme are still ongoing in parliament.

In essence, the expansion of the tax base needs to be encouraged through intensification and extensification policies, as well as simplification of the taxation system, while still upholding the value of justice.

Efforts to expand the tax base should focus more on economic activities and transactions in sectors that have not been included in the tax system radar (shadow economy).

Then, legal certainty, ease of business licensing, security guarantees, and business sustainability are also equally important. It is not easy to live up to all these expectations, but it is not impossible either.


**) A short version of this article was published in Kompas.com on 8 September 2021. 


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


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