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Indonesia: Selected Issues

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International Monetary Fund
Published Date:
October 2011
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III. Revenue Mobilization in Indonesia1

The tax revenue to GDP ratio in Indonesia is one of the lowest in the G-20 and among emerging markets. Revenue mobilization requires strengthening broad-based taxes and improving tax compliance. Efforts should lead to a more efficient and fairer tax system that enhances economic growth. The Indonesian government has set ambitious targets for the medium term of raising the tax to GDP ratio by 2–6 percentage points. This paper reviews the level and structure of tax revenues in Indonesia compared to other countries, estimates tax effort and tax efficiency for Indonesia, and discusses potential areas of revenue mobilization.

A. A Strategy for Revenue Mobilization

1. Many economies face the challenge of mobilizing revenue to provide space for poverty relief and infrastructure improvement. Revenue mobilization however goes beyond raising tax rates. Simply increasing revenue by further taxing compliant taxpayers can cause distortions and increase inequalities. Raising revenues in an increasingly globalized economy requires strengthening broad-based taxes and improving tax compliance. Revenue mobilization efforts should lead to a more efficient and fairer tax system that enhances economic growth. Distributional effects are also very important for two reasons. Poverty relief is one of the major objectives financed by public revenues, but perceived equity also has an important impact on tax compliance.

2. In 2000 Indonesia launched an economic reform program to achieve stability and growth.2 As oil production was projected to decline in the coming years, an increasing buoyancy of non-oil and gas tax revenues was becoming necessary. Alongside tax change proposals, the authorities also sought to improve tax administration to generate higher revenues.

3. Tax policy has been stable in the last decade. The structure of the tax system remained unchanged as only small-scale changes took place, such as decreasing the corporate income tax and personal income tax rates and increasing the personal allowance in the PIT system.

Box III.1.General Recommendations on Revenue Mobilization 1/

Although each tax system is different, some of the most effective recommendations for revenue mobilization are the following:

  • Building administrations that limit incentives and opportunities for rent seeking and are capable of implementing the voluntary compliance needed to extend the tax base;

  • Adopting and making readily available clear laws and regulations embodying strong taxpayer protection;

  • Eliminating exemptions that forgo revenue to little useful end;

  • Implementing a broad-based VAT with a fairly high threshold;

  • Establishing a broad-based corporate income tax, at rates competitive by international standards;

  • Extending the PIT base, and ensuring a coherent treatment of alternative forms of capital income;

  • Levying excises on a few key items that address revenue needs and wider social concerns;

  • Implementing simple but coherent regimes for taxing smaller businesses;

  • Strengthening real estate taxes; and

  • Developing capacity for tax expenditure and wider policy analysis.

1/ For a comprehensive discussion of issues, prospects and recommendations on revenue mobilization see International Monetary Fund (2011).

4. Progress with tax administration reform, however, remains slow and uneven. Achievements include a new organizational structure implemented in early 2007, the creation of 19 medium taxpayer offices, 300 small taxpayer offices, and high-wealth individual offices between June 2007 and 2009. Furthermore, improvements in the taxpayer registration process resulted in an almost four-fold increase in the number of registered taxpayers between 2006 and 2009. There was some progress with the implementation of more effective methods for tax filing, simplification of tax forms, and introduction of new audit policies and procedures. Although improving, tax administration remains relatively weak with poor enforcement procedures and low voluntary compliance. Progress in the audit area and in arrears collection has also been slow. This contributes to the low collection of non-oil and gas revenues.

B. Level and Structure of Tax Revenues in Indonesia3

5. Continued efforts are needed to raise the share of tax revenue from its current low level. The tax revenue to gross domestic product (GDP) ratio in Indonesia—11.5–13.3 percent during 2002–10—is one of the lowest in the G-20 and among emerging countries. The tax to GDP ratio was increasing until 2008, but dropped in 2009, mostly due to cuts in the corporate income tax rate; and it is not expected to increase substantially in 2011. The authorities however have ambitious targets for the future. The government set a goal above 14 percent for 2014. The low tax burden is the result of several factors. Tax bases for major taxes are very narrow in Indonesia, and tax compliance is very weak. These weaknesses will have to be corrected to mobilize additional revenues.

Figure III.1.Tax Revenue to GDP

(In percent)

Sources: IMF, World Economic Outlook; and IMF, Government Finance Statistics.

Table III.1.Selected Countries: Tax Revenue, 2002–10(In percent)
200220032004200520062007200820092010
Indonesia11.511.812.212.512.212.413.311.111.6
Brazil23.222.623.224.023.724.224.122.925.5
China14.714.715.115.616.117.217.317.518.4
India13.914.415.215.616.817.716.815.915.5
Philippines12.812.812.413.014.314.014.212.812.8
Thailand15.516.917.418.118.517.317.516.416.8
Turkey16.718.217.918.218.918.318.118.519.4
Vietnam18.420.921.722.824.323.524.422.323.6
Unweighted average15.816.516.917.518.118.118.217.217.9
Source: IMF, World Economic Outlook.
Source: IMF, World Economic Outlook.

6. The overall design of the Indonesian tax system is broadly in line with international best practices. It consists of corporate and individual income taxes, value-added tax (VAT), excise taxes, international trade taxes, and a property tax. However, it yields low revenue, and important elements are complex and hard to administer. The standard value-added tax rate in Indonesia is 10 percent, somewhat lower than neighboring countries’ standard VAT rates of 7–20 percent, or around 12 percent on average. The corporate income tax rate is 25 percent for resident and 20 percent for nonresident companies, which is in the range of countries in the region, but at the lower end. All countries in the region have progressive personal income tax systems with several tax rates. The highest marginal PIT rate in Indonesia (30 percent) is within the range of neighboring countries (20–45 percent) (Table III.2).

Table III.2.Selected Countries: Value-Added Tax, Corporate, and Individual Income Tax Rates
VAT RatesCorporate Income Tax Rates
Current as ofStandard rateOther positive ratessident companNonresident companies
ReducedIncreasedIndividual Income Tax Rates
0; 1.5, 2.25;27.5; 37.5;
BangladeshJanuary 1, 2011154; 4.5;20–350242.5; 45337.5; 42.540; 10; 15; 20; 25
5.0025; 5.51
BhutanDecember 1, 2010n/a30300; 10; 15; 20; 25
CambodiaJanuary 1, 20101020200; 5; 10; 15; 20
China (PR)July 1, 2010170; 3; 13520; 256255; 10; 15; 20; 25; 30; 35; 40; 45
IndiaJanuary 1, 2011730400; 10; 20; 30
IndonesiaJanuary 1, 201110025205; 15; 25; 30
Lao PDRJune 1, 201010025250; 5; 10; 15; 20; 25
MalaysiaNovember 1, 201025250; 1; 3; 7; 12; 19; 24; 26
NepalDecember 1, 201013020; 25; 3085; 10; 20; 25; 3091; 15; 2510
0; 0.75; 1.5; 2.5; 3.5; 4.5; 6, 7.5;
9; 10; 11; 12.5; 14; 15; 16; 17.5;
PakistanNovember 1, 2010170; 218.5; 21; 2520; 351120; 351118.5; 2012
0; 7.5; 10; 15; 20; 2513
PhilippinesJanuary 1, 2010120; 530205; 10; 15; 20; 25; 30; 32
Sri Lanka202015; 3515; 35
ThailandJanuary 1, 20107030300; 10; 20; 30; 37
VietnamFebruary 1, 2010100; 525255; 10; 15; 20; 25; 30; 35
Source: International Bureau of Fiscal Documentation (IBFD).

Reduced rates apply to land development and building construction firms (1.5 percent); medical and dental care centers (2.25 percent); procurement providers (4 percent); legal advisors (4.5 percent); motor vehicle garages and workshops (4.5 percent); electricity distributors (5.0025 percent), and construction firms (5.5 percent).

Increased rates apply to luxury goods and “socially undesirable goods.”

27.5 percent rate applies to publicly-traded companies; 37.5 percent rate applies to other closely-held companies; 42.5 percent rate applies to banks, insurance, and other financial institutions; 45 percent rate applies to mobile phone operating companies (except if converted into publicly-

42.5 percent rate applies to banks, insurance, and other financial institutions.

3 percent rate applies to small-scale taxpayers; 13 percent rate applies to essential goods.

20 percent rate applies to low-profit enterprises.

VAT collected at the state level.

20 percent rate applies to entitities engaged in specific industries or projects, or export income; 30 percent rate applies to banks, general insurance, and other financial institutions, as well as petroleum businesses; 25 percent rate applies to all other entitites.

5 percent rate applies to shipping, air transport, and telecommunications; 10 percent rate applies to repatriated income of a foreign PE of a nonresident person situated in Nepal.

A 1 percent social security tax is imposed on the first bracket of salary earners’ taxable income.

20 percent rate applies to small companies; a presumptive tax regime applies in specific cases.

For individuals whose salary is more than 50 percent of taxable income.

For individuals whose salary is less than 50 percent of taxable income.

Source: International Bureau of Fiscal Documentation (IBFD).

Reduced rates apply to land development and building construction firms (1.5 percent); medical and dental care centers (2.25 percent); procurement providers (4 percent); legal advisors (4.5 percent); motor vehicle garages and workshops (4.5 percent); electricity distributors (5.0025 percent), and construction firms (5.5 percent).

Increased rates apply to luxury goods and “socially undesirable goods.”

27.5 percent rate applies to publicly-traded companies; 37.5 percent rate applies to other closely-held companies; 42.5 percent rate applies to banks, insurance, and other financial institutions; 45 percent rate applies to mobile phone operating companies (except if converted into publicly-

42.5 percent rate applies to banks, insurance, and other financial institutions.

3 percent rate applies to small-scale taxpayers; 13 percent rate applies to essential goods.

20 percent rate applies to low-profit enterprises.

VAT collected at the state level.

20 percent rate applies to entitities engaged in specific industries or projects, or export income; 30 percent rate applies to banks, general insurance, and other financial institutions, as well as petroleum businesses; 25 percent rate applies to all other entitites.

5 percent rate applies to shipping, air transport, and telecommunications; 10 percent rate applies to repatriated income of a foreign PE of a nonresident person situated in Nepal.

A 1 percent social security tax is imposed on the first bracket of salary earners’ taxable income.

20 percent rate applies to small companies; a presumptive tax regime applies in specific cases.

For individuals whose salary is more than 50 percent of taxable income.

For individuals whose salary is less than 50 percent of taxable income.

7. Income taxes (corporate and individual) were 5.7 percent of GDP in 2009. It is lower than the average of Asia-Pacific or lower-middle income countries, but broadly in line with neighboring, comparable countries. Official statistics do not split-up income tax revenues between corporate and individual taxpayers, but estimations show that about 80 percent (4.4 percent of GDP) of income tax revenues came from corporate taxpayers, which is somewhat above the average of comparable countries. Based on the estimation, personal income tax revenues are as low as 1.3 percent of GDP.

8. Taxes on goods and services (4.8 percent of GDP) are lower than the average of comparable countries. The majority of these revenues come from VAT, 3.8 percent of GDP. However, it also includes a luxury tax applied to an extensive range of goods. Excise tax revenues are below the level of comparable countries, at only 1 percent of GDP.

Table III.3.Selected Countries: Tax Structure and Tax Levels(In percent of GDP)
Direct TaxesIndirect Taxes
TotalPITCITTotalSales, Turnover, & VATExcises
YearTax RevenueTrade TaxesProperty Taxes
Bangladesh20088.32.01.30.73.02.90.02.80.0
Brazil200915.67.01.64.17.66.00.40.50.0
Cambodia20068.21.10.20.94.62.91.42.50.0
China (P.R.)200917.54.53.41.29.57.11/1.51/0.80.3
India200812.56.52.34.13.90.02.52.20.0
Indonesia200911.55.71.31/4.41/4.83.81.00.30.5
Malaysia200915.710.72.38.43.71.31.50.50.0
Pakistan20079.83.73.60.04.43.60.81.50.1
Philippines200814.26.52.03.94.11.90.83.50.0
Sri Lanka200813.32.90.51.46.94.62.32.20.0
Thailand200816.57.92.15.87.43.73.41.10.0
Turkey200918.55.94.01.911.26.14.60.30.9
Vietnam200421.58.20.57.79.75.82.03.00.5
Unweighted Average14.55.61.93.46.23.81.71.60.2
Sources: IMF, Government Finance Statistics; and IMF, World Economic Outlook.

Split up based on estimation.

Sources: IMF, Government Finance Statistics; and IMF, World Economic Outlook.

Split up based on estimation.

9. The level and structure of tax revenues have been very stable in the last decade. Tax revenues remained between 11.4–13 percent of GDP since 2001, with a slight increase in the first few years and a decrease from 2008 to 2009. The structure of revenues also remained very stable in the last 10 years: income taxes comprise around 50 percent of all tax revenues, consumption taxes around 40 percent, property taxes 4–6 percent and trade taxes around 3–5 percent. Compared to the 1990–1999 period the role of income taxes decreased and the share of consumption taxes increased by a small amount. Property taxes also became more important in the last decade (Figure III.2).

Figure III.2.Indonesia: Level and Structure of Tax Revenues, 2002–11

(In percent)

Sources: IMF, Government Finance Statistics; and Author’s calculations.

10. The taxpayer population is narrow in Indonesia, but has been steadily increasing in the last decade. In 2009 the number of registered individual taxpayers was around 5 million and further improved in 2010 and 2011. The number of registered corporate taxpayers has also been gradually increasing, but is only around half a million. The authorities currently face the challenge of raising the number of tax files returned by the registered taxpayers, therefore, increasing their compliance. It also entails a greater administrative burden. To cope with these new challenges, further improvements are necessary in data processing capacities, training of staff, and simplifying procedures for handling returns and audits.

C. Tax Effort and Tax Efficiency

11. There is evidence that tax efficiency is relatively low by regional standards. The tax efficiency ratio, measured as tax revenue as a percentage of GDP or consumption, divided by the standard tax rate, is relatively low compared to the average for East Asia and for other middle-income countries, in particular for corporate income tax (CIT) and VAT. The low overall tax to GDP ratio is partly a result of tax rates lower than the regional average. Tax rate differences explain some of the divergence in tax revenues as a percentage of GDP. Income tax revenues are in line with comparable countries, whereas consumption tax revenues are somewhat below average.

12. As noted earlier, low revenue mobilization limits the fiscal resources available for physical and social infrastructure development. Therefore, it is essential to assess what, at the present level of development, is a realistic revenue target for Indonesia. To address this point, we make estimates based on several tax efficiency measures.

13. Improving tax efficiency raises tax revenues in two ways. “Policy gap” is the difference between collections under current law and those obtained if all exemptions not consistent with best practice and all reduced rates were eliminated. Policy gap can be reduced by broadening the tax bases. As can be noted in Table 3, VAT efficiency is very high in Thailand. The reason is that Thailand has very few exemptions in their VAT system, no reduced rate and the zero VAT rate is limited to a very few items (exports, diplomats, NGOs). “Compliance gap” is the difference between current tax collections and those that would be obtained if the existing tax law was perfectly enforced. Compliance gap can be reduced by revenue administration reforms. As Table III.1 showed, China has been able to continuously increase its tax revenues in the last decade through a comprehensive tax administration reform. Tax administration reform efforts, however, usually yield their results over an extended period of time.

Table III.4.Tax Efficiency Indicators(In percent)
Indonesia 2009Philippines 2009Thailand 2007China 2006India 2009East Asia and the PacificLow- and Mid-Income CountriesWorld
Total tax revenues to GDP11.512.817.416.115.919.620.520.0
VAT
Rate10.012.07.017.010.815.615.8
Revenue share of GDP3.82.23.85.85.27.46.4
Revenue share of consumption5.62.65.811.1
Tax efficiency38.318.354.333.948.247.440.3
C-efficiency 1/56.021.682.765.0
Corporate income tax
Rate (maximum)25.030.030.025.030.027.625.526.4
Revenue share of GDP4.43.35.21.23.95.53.33.5
Tax efficiency17.611.017.34.613.120.012.713.1
Sources: IMF, Government Finance Statistics; IMF, World Economic Outlook; and Budina and Tuladhar (2010).

C-efficiency is tax efficiency calculated based on consumption.

Sources: IMF, Government Finance Statistics; IMF, World Economic Outlook; and Budina and Tuladhar (2010).

C-efficiency is tax efficiency calculated based on consumption.

14. Corporate income tax efficiency is below the average of Asia Pacific countries, but above the average of lower middle-income countries. There is space for improvement in income tax revenues from corporations. The 2009 CIT revenues are estimated at 4.4 percent of GDP which, together with the CIT rate of 25 percent, gives a tax efficiency of 17.6 percent. This is higher than some of the neighboring countries. If Indonesia could reach the average level of Asia Pacific countries through substantial base broadening and greater enforcement, CIT revenues would increase from the current estimated 4.4 percent to about 5 percent of GDP.

15. Value-added tax efficiency is somewhat below average. VAT efficiency in Indonesia is around 38 percent based on GDP and 56 percent based on consumption. If VAT efficiency was raised to the average of lower middle-income countries (47.4 percent), VAT revenues would increase by an additional 1 percentage point of GDP. If Indonesia could reach the efficiency level of Thailand, VAT revenues would increase by 1.8 percent of GDP. Increasing VAT C-efficiency to 100 percent—which means that all exceptions are removed, and full compliance is achieved—would increase revenues by 3 percent of GDP. This is only a theoretical tax revenue indicator however, and not an actually achievable target. Following an earlier exercise that divided the VAT gap into policy and compliance gaps (IMF, 2010), we estimate that closing the VAT policy gap could raise revenue of 1.6 percent of GDP while closing the compliance gap could raise revenue of 1 percent of GDP.

16. Statistical techniques are also available to estimate the tax capacity and tax effort of the overall tax system. Tax capacity represents the maximum tax revenue that a country can collect under its level of economic and social development and demographic characteristics. Based on estimated tax capacity, a country’s tax effort can be measured by the ratio of actual tax revenue collected to the estimated tax capacity.4 Figure 2 presents the estimated tax efforts for a sample of Asia-Pacific countries and median values for countries of different income groups. Indonesia is around the middle of the group, with tax efficiency of 53.8 percent. This figure means that the country collects about 53.8 percent of the maximum tax revenues that it could achieve. Although, in Indonesia, tax effort is higher than in several neighboring countries, it is lower than the median value of low and lower middle income countries, indicating substantial space for improvement.

Figure III.3.Selected Countries: Tax Effort

(In percent)

Sources: Pessino and Fenochietto (2010); and staff calculations.

17. Based on the actual tax-to-GDP ratio of 11.6 percent in 2010 the tax capacity of Indonesia is estimated at around 21.5 percent of GDP. This is a theoretical value, however, as reaching 100 percent of the potential tax capacity is unprecedented. More realistic targets are median values of lower middle-income countries or an ambitious target could be the median value of upper middle-income countries. These give a range of potential revenue targets for the medium term of 13.4–16.4 percent of GDP, which is a 2–5 percentage point improvement of tax revenues. This target of potential revenue is based on broadening tax bases and increasing tax compliance.

D. Potential Areas for Improving Revenue Mobilization

18. As emphasized above, low revenue mobilization hinders economic development by limiting investment in infrastructure and social development. Therefore, it is essential to identify areas where greater revenue could be mobilized without limiting economic growth. A general recommendation is to eliminate exemptions of all taxes and hence broaden tax bases. This generally results in a fairer and simpler tax system.

Indirect Taxes

19. The design of the VAT system is generally sound. There is a single positive rate of 10 percent, and zero-rating is limited to exports. There is a simplified regime for small taxpayers. However, an extensive group of goods and services are not subject to VAT. These are goods resulting from mining or drilling (crude oil, natural gas, coal, tin, etc.), basic necessities (rice, grain, corn, sago, soybean, salt, etc.) and food and beverages served in hotels and restaurants. VAT exempt services include some medical and social services, postal services, banking, insurance and other financial services, religious services, services in education, art, entertainment, broadcast advertising, public transportation, employment services, training for workers, government services, etc. There are administrative shortcomings related to the VAT system too, involving refunds and audits. These inefficiencies should be reviewed and reconsidered to allow Indonesia to move closer to its potential VAT revenues from the current level.

20. VAT revenues can be increased without raising the tax rate by removing inefficiencies. A common argument for VAT exemptions is based on equity objectives. The reasoning is that poor households spend a greater share of their income on basic necessities, and reduced rates and exemptions, therefore, will benefit these income groups. However, higher income groups typically spend more on these consumption goods in absolute value, and therefore, receive a higher share of these benefits. Thus, targeting of this subsidy is often very poor, making it an inefficient instrument that erodes the tax base.

21. Removing VAT exemptions clearly improves the efficiency of the tax system while poor households can be compensated with targeted transfers at lower fiscal costs. In addition, improved tax compliance through better revenue administration and tax audits can also increase VAT revenues. The following measures could increase efficiency:

  • Taxing mining, hotel and restaurant services, postal services, art, entertainment, broadcast advertising, public transportation, employment services, training for workers, and government services at the standard VAT rate;

  • Narrowing down exemptions to financial services, religious services, health, education and basic foods; and

  • Limiting zero rate to exports, and international obligations

22. Next to the VAT system there is also a luxury sales tax. This is paid on top of the VAT with rates of 10–75 percent with some 350 tariff codes. The luxury sales tax is very complex but yields little revenue, and administrative costs are disproportionately high. It has been recommended before that this tax should be eliminated and integrated into the VAT system.

Personal Income Tax (PIT)

23. The personal income tax system is well-designed and reasonably simple including a general withholding of tax at source. The progressive scheme consists of four tax brackets with rates of 5–30 percent. Taxpayers are eligible for personal deductions, whose amount depends on the marital and family status of the taxpayer. Capital income is taxed at 15 percent (dividends and interest) or 20 percent (capital gains). Income earned from specific services (lawyers, accountants, architects, doctors, consultants, notaries, appraisers, and actuaries), however, are not included in the tax base but are taxed at a single rate of 15 percent. A major source of income exempt from the PIT is fringe benefits, which are currently tax free. A potential drawback of the tax regime is that every taxpayer must make a tax return, even with a single source of income, which puts a great administrative burden on the tax authority. Revenues from PIT are well below comparable averages, mostly due to the narrow taxpayer population. Potential areas for raising personal income tax revenue, in addition to including fringe benefits in the PIT system, are increasing compliance by expanding the taxpayer population and simplifying administration.

Corporate Income Tax (CIT)

24. The standard corporate income tax rate (25 percent) is in line with other countries. Several companies receive preferential treatment. Discounted tax rates apply to publicly listed companies (5 percentage point discount) and small enterprises (50 percent discount). Main contractors of government projects funded by foreign aid are exempt from import duties and VAT. Free trade zones are set up to attract foreign direct investment, and Indonesia provides several types of tax incentives for corporations in certain regions and industries:

  • An investment allowance of 5 percent for six years;

  • Accelerated depreciation and amortization;

  • Reduced dividend withholding tax rate of 10 percent, unless the rate provided in the relevant tax treaty is lower;

  • A loss carry-forward period of 8 years or 10 years as opposed to the standard five years; and

  • Special tax rates to certain industries

International experience shows that tax holidays are not effective compared to their fiscal cost.5 They are open to abuse and provide many opportunities for tax avoidance, eroding the tax base. CIT revenues could greatly be increased by removing most inefficiencies and incentives of the corporate income tax system over a pre-set period of time.

25. Indonesia also provides investment facilities in the form of Free Trade Zones (FTZ). Goods entering into the FTZ are exempt from import and export duties, excises, VAT, and luxury tax. The tax free status of the FTZ endangers VAT and other tax revenues by making revenue leakage possible.

The following measures could be considered to increase efficiency of the CIT system:

  • Limiting discounted tax rates to small enterprises;

  • Eliminating exemptions on government contractors;

  • Eliminating reduced dividend withholding tax rate;

  • Narrowing down special tax rates on certain industries; and

  • Reviewing and limiting other incentives (preferential loss-carry forward, depreciation and amortization rules, and tax allowances).

E. Conclusion

26. Indonesia faces the challenge of mobilizing revenue to provide fiscal space for poverty relief and infrastructure improvement. However, simply increasing revenue by further taxing compliant taxpayers can cause distortions and increase inequalities. Raising revenues in an increasingly globalized economy requires strengthening broad-based taxes and improving tax compliance. While the number of personal income taxpayers increased substantially in the last decade, it is still narrow; and furthermore, only a small share of registered taxpayers actually return a tax file. Accordingly, tax efficiency is relatively low by regional standards, both for the CIT and VAT. Overall tax effort—measured as the ratio of actual tax revenue to the estimated tax capacity—is around 54 percent. Realistic targets are in the range of 13.4–16.4 percent of GDP in the medium term, which is a 2–5 percentage point improvement from current levels. This target of potential revenue is based on broadening tax bases and increasing tax compliance.

27. The overall quality of the tax system is the most important factor. In general, the number of taxes should be small and should be applied with moderate rates on broad bases. Tax exemptions and incentives cost revenue with little gain. Therefore, efficiency can be increased by broadening the base of all taxes by limiting and removing exemptions. Tax policy is a costly instrument for social purposes. It is more efficient to have higher-yielding taxes to finance well-targeted pro-poor expenditure programs. Also, simple and transparent rules and simple administration increases compliance and efficiency.

References

Prepared by Dora Benedek.

A summary of this program can be found in Brondolo and others (2008).

Comprehensive discussion of the Indonesian tax system can be found on the Directorate General of Taxes of the Republic Indonesia webpage and Price Waterhouse Coopers (2010).

For example, Pessino and Fenochietto (2010) estimate a stochastic frontier function as tax effort function, based on a sample of 96 countries, using economic, social, institutional, and demographic characteristics as explanatory variables. The author is very grateful to Ricardo Fenochietto for re-estimating the tax effort function of Indonesia using more recent data.

International experience is described in detail in Guin-Siu (2004) and Zee and others (2002).

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