Menu
Account
Indonesia's Flawed Tax Amnesty
Image Credit: Flickr/Eduardo M.C.

Indonesia's Flawed Tax Amnesty

 
 

As Indonesia’s tax amnesty program comes to an end this month, President Joko “Jokowi” Widodo seems to have much cause for celebration. Over the past eight months, the program has become the largest amnesty in history, generating a plethora of impressive statistics. By the end of 2016, 4,337 trillion rupiah ($324 billion) in assets had been declared, an additional 1,283.6 trillion ($96 billion) in revenue had been paid to the Ministry of Finance, and over three million new Indonesians had become taxpayers. Regional media outlets have been liberal with their praise, citing those figures as evidence of a triumph for the Indonesia leader. However, those numbers mask a disappointing reality.

When measured by its ability to deliver positive change, or even by the lower benchmark of avoiding the problems that have doomed similar policies in nations like Pakistan and Argentina, Jokowi’s tax amnesty cannot be considered a success. The supposed benefits – the collection of additional revenue and the expansion of the tax base via increased participation and repatriation – have been marginal, while the feared costs – greater perceptions of inequity and the encouragement of tax evasion – have materialized to a potentially debilitating extent.

Instead of facilitating an increase in tax collection, this program has had a negligible impact on the growth of government revenue. Despite the tax amnesty’s incentive of lower-than-usual tax rates, Indonesia’s Ministry of Finance collected just 83.4 percent of its projected revenue in 2016. Perhaps most demonstrative of the inefficacy of Jokowi’s tax amnesty in this respect is that the growth of revenue collection in 2016 actually declined compared to 2015 and 2014, meaning that the program failed to nudge tax collections beyond natural growth rates.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

The effect on Indonesia’s tax base has been just as insignificant. While the Directorate General of Taxation reported that 3.05 million individuals had become taxpayers in 2016, that figure is not only comparable to 2015 and 2014 figures – another instance where the amnesty has been unable to push tax-related growth beyond natural rates – but it is immaterial in a nation of 255 million facing a deficit of 268 trillion rupiah ($20 billion). Three million new taxpayers barely make a dent in Jokowi’s twin goals of widespread tax compliance and deficit reduction. To make matters worse, those individuals are not the “big fish” that would noticeably add to the tax base and increase long-term revenue collection. Less than 100 of the new participants paid more than 10 billion rupiah ($750,000) in penalties. An identical point can be made about asset repatriation. While 4,337 trillion rupiah in previously-unknown assets had been declared, less than two percent of that amount – 89.6 trillion rupiah – had actually been returned to Indonesia by the end of 2016, and even then, mostly as cash or cash equivalents instead of illiquid assets that could be subject to long-term taxation.

In contrast to those elusive, unrealized benefits, the costs of this tax amnesty have been particularly pronounced. Prominent groups within Indonesian civil society have been boisterous in their opposition to the program. Last fall, thousands of workers gathered in Jakarta to protest the tax amnesty, and their grievances have been continuously brought to bear by some of the nation’s largest and most influential labor unions. The perceived inequity engendered by this policy has been so severe that even international organizations have taken note, with prominent officials from the OECD and the Tax Justice Network publicly cautioning Jakarta. In the veritable powder keg that is Indonesian politics, where socio-economic and ethnic flare-ups seem to be the norm, not the exception, this is not a positive development.

Likewise, this amnesty has actually served to encourage further tax evasion. Despite Jokowi’s statement last summer that this would be Indonesia’s “last-ever” tax amnesty, Indonesians remain well aware of the frequency in which this tool has been used (there have been four amnesties since independence, with the last one occurring in 2008) and thereby expect another reprieve to follow, which incentivizes them to delay participation and continue to operate outside the system. The OECD’s October 2016 Survey of Indonesia noted the pervasiveness of this belief, and even relied on it to explain the aforementioned shortcomings in revenue collection, participation and asset repatriation.

Fortunately for Jokowi and his colleagues, these striking costs and non-existent benefits have been hidden behind a public relations campaign that has largely managed to divorce superficially impressive statistics from the pertinent context. Unfortunately, when the dust settles and the amnesty ends, and no new statistics can be used to distract and defer, Jokowi will have little to show for his monumental initiative beyond a frustrated working class, greater tax evasion, and an even larger revenue deficit. And in Indonesia, that is a recipe for disaster.

Steven Keithley is a third-year law student at the University of Virginia School of Law, where he serves as an editor of the Virginia Law Review. He formerly served as executive editor of the Virginia Journal of International Law.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief