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How Indonesia’s new president aims to boost nationwide tax revenue

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Indonesia’s incoming president and vice-president Prabowo Subianto and Gibran Rakabuming Raka have set an ambitious tax plan to increase their country’s ratio of tax revenue to Gross Domestic Product (GDP) to 23 per cent from its current level of just over 10 per cent. To realise this political promise, radical reforms to Indonesia’s tax system are necessary.

During their campaign, Prabowo and Gibran proposed the establishment of the State Revenue Agency (BPN), an initiative that centralises all matters of state revenue within a single entity that would report directly to the president. With the BPN operating under the president’s direct supervision, Prabowo and Gibran pledge a transformative overhaul in the management of state revenue. But detailed plans on how this agency will strengthen efforts to achieve the bold target — reaching 23 per cent of national GDP — are yet to be fully revealed. 

This target is a bold aspiration, especially when considering that over the past decade, the peak tax revenue ratio to GDP in Indonesia barely touched 11.4 per cent. Last year’s 2023 tax ratio was 10.21 per cent of GDP, with total tax revenue at Rp 1869 trillion (US$120.5 billion).

The Revenue Statistics in Asia and the Pacific 2023 report released by the OECD reveals that the average tax ratio in various Asian and Pacific countries stands at 19.8 per cent. Aiming for a 23 per cent tax ratio in Indonesia — not only more than double the current rate, but ahead of the current regional average — is not just an aspirational target but a long journey filled with challenges. As an agency believed capable of significantly elevating the tax ratio, the BPN nonetheless faces a formidable task.

The inefficiency in Indonesia’s tax collection is not just due to institutional inefficiencies but also stems from the complex economic dynamics poorly captured by the Finance Ministry’s Taxation Directorate General. This is especially apparent in its failure to tax the shadow economy, which represents about 26 per cent of the nation’s total economy, or roughly Rp 5223 trillion (US$336 billion) in 2023. 

Establishing the BPN is not on its own a definitive solution for improving fiscal performance. Any proposal to establish the BPN should be thoroughly evaluated to ensure it effectively boosts state revenue without unnecessarily straining the state budget through organisational restructuring costs.

As a new entity, there are doubts about the BPN’s capability to effectively increase state revenue in its initial stages. This scepticism is not unfounded, given that the BPN results from the integration of the Directorate General of Taxation (DGT) and the Directorate General of Customs and Excise, which is also within the Finance Ministry. This integration process is not without significant administrative challenges, raising questions about how quickly the BPN can transition and focus its efforts on optimising state revenue.

The BPN’s effectiveness in enhancing state revenue heavily relies on the degree of autonomy and political support it receives. With greater autonomy, BPN is likely to increase revenue more aggressively. 

The DGT has struggled to harness the tax potential from activities in the shadow economy, including digital transactions. To address this challenge, the BPN, which is expected to be equipped with a high level of autonomy, should be capable of identifying financial flows within these digital transactions.

A more definite step would involve the BPN improving its data-sharing mechanisms with the Indonesian Financial Transaction Reports and Analysis Center (PPATK). Given that both the proposed BPN and the existing PPATK operate under the direct supervision of the president and would be on the same level within Indonesia’s bureaucratic hierarchy, enhancing data sharing between these entities could significantly aid in tracking and taxing financial activities more effectively. This collaboration could serve as a pivotal strategy in uncovering and taxing hidden economic activities.

As a more autonomous institution than the current DGT, BPN is expected to focus more effectively on its responsibilities, operating independently and without political interference. This autonomy allows it to devise and implement management strategies autonomously, emphasising the importance of leadership with credibility, integrity and expertise in fiscal administration. 

Given the critical role of BPN leadership in managing state revenues, their selection is paramount and necessitates a transparent, objective and merit-based process, free from political bias. To ensure this, an independent selection committee with expertise in state revenue and human resources is essential for evaluating candidates’ competence, integrity and vision. This can help ensure BPN’s progress through high standards and professionalism.

The Prabowo–Gibran vision for tax reform through the BPN aims for significant fiscal improvement, demanding meticulous strategy, strong political will and a leadership selection process that prioritises transparency and merit to realise its benefits without straining the state budget. 

But without genuine dedication and consistent efforts, this initiative risks becoming only a political gesture, merely redistributing power rather than enhancing state revenue.

Agatha Bagus Ilhamy is an Associate at the Ministry of Finance of the Republic of Indonesia. The author’s opinion is his own and does not represent that of any institution.

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The post How Indonesia’s new president aims to boost nationwide tax revenue first appeared on East Asia Forum.

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