An Analysis Of Personal Income Tax
Compliance Rate In Indonesia
For The Year 1996-2004

Graduate School Of Economics Hitotsubashi University
Friska Parulian Panjaitan
June 2005

CHAPTER IINTRODUCTION
1.1 BackgroundThe economic crisis in 1998 has caused great budget cost for the Indonesian
government. The main part of this huge fiscal expense is for the banking restructuring
program that cost Rp 648 trillion, does not include the interest that must be paid.
Furthermore huge depreciation of the Rupiah also contributes to the expansion ofenergy subsidy (fuel and electricity’s subsidies). Thus, efforts to increase the revenue
and increase the efficiency of expenditure have become an important issue for thegovernment to guarantee fiscal sustainability in the future.
The need for expansion as mentioned above requires funding. However, thetraditional sources of funding, the income from oil and gas, become less reliable sinceIndonesia is becoming a net oil importer country. In addition, the revenue from foreignloans shows a decreasing trend in the near future. Thus, it is obvious that the domestic
revenue have to be increased, and one of the important sources is the tax revenue.
The results of the Indonesia-Japan Economic Cooperation Working team asindicated in report dated October 2004, shows that there are several indicators of theopportunity to increase national tax revenue without having to increase the current
rates, which are:z

Low tax ratio compare to other countries. In year 2003 the ratio of tax revenue
to GDP was 11.9%, compare to India (11.49%), Pakistan (13.76%), Srilanka(19.8%), Malaysia (18.5%), and Thailand (16.5%).

z

Realization of tax revenue is still below potential. For example the corporate
tax revenue that is paid by State Owned Enterprises is still larger than theprivate sector. While, compare to the role of state owned enterprises in terms ofGDP, it is far below the private sector contribution.

z

The elasticity of tax collection for all types of tax is still greater than one,indicates that the actual potential tax has not been achieved.

z

There is a tendency that the tax revenue concentrates on few tax payers only.
For example in year 2002, 1% of registered individual tax payers contributed to
50% of personal income tax, while 2% of registered tax payers contributed tomore than 80% of corporate income tax revenues. These figures reveal asignificant potential for tax revenue expansion through the tax base rather
than the increasing of the tax rate.

11.2 Research Aims
This research aims to analyze the existing income tax potential, review thecurrent tax system in Indonesia, observes the source of problem, in order to recommend
some alternative suggestion in order to increase the income tax revenue level in the
future. However, the scope of income tax potential in this research only covers the
Personal income tax (PIT).
1.3 A Brief Overview of Indonesia Tax System
1.3.1

Tax Subject
Indonesia income tax law adopts residence principle with regard to domestic tax

subjects. Both individual and corporation are subject to tax on all income received orearned both from a source in Indonesia and abroad (worldwide income concept). While
with regard to foreign tax subjects (non residents), both individual and corporation are
subject only to tax on income from sources in Indonesia (source of income concept). Thus,
the income tax law does not give different tax treatment based on nationality or
citizenship status. A resident taxpayer is defined as an individual present in Indonesia
for more than 183 days during a tax year or having the intention to reside in Indonesia.
1.3.2

Income Tax Object
A tax object shall be income, meaning any increase in economic capability

received or accrued by taxpayer, originating from within or without Indonesia, which
can be used for consumption or to increase the wealth of the taxpayer concerned
including:zsalary, wage, honorarium, commission, bonus, gratuity, pension orcompensation in other forms, except where stipulated otherwise in the lawzlottery prizes of gifts from work or other activitiesz

profit from businessz

gain from the sale of transfer of property, interestzinterest, including premiums, discounts and compensation from loan
repayment guaranteeszdividends, including dividends paid by an insurance companyzroyaltieszrent and other income related to the use of property annuities received or
accruedz

gains from the cancellation of indebtnessz

gain from fluctuation in foreign currencies

2

zgains from revaluation of propertyz

insurance premiums

While those mentioned below are excluded:z

aid or donation and gifts received by blood relatives with one degree of
direct lineage an by religious, educational or social bodieszinheritanceszproperty including cash depositszpayment by an insurance firms to an individual in connection with health,accident, life, dual purpose or education insurancezdividends or a share of profit received by an enterprise owned by the state ora regional government

1.3.3

z

contribution received by a pension fund approved by the Minister of Financez

interest on bonds received or accrued by an investment fund firm

Deduction of Taxable income

a. Business deductions: A specific tax exemption or concessional deduction covering
approved business and occupational expenses is granted, amount to 5% of the grossincome with a maximum of Rp 648,000/annum
b. Non business expenses: Contribution to a pension fund approved by the minister ofFinance are recognized in full as allowable deductions, as are an employee’s
contributions to Jamsostek for old age savings (2% of gross income).
c. Personal allowances:
Table I.1 Deduction of Taxable Income
Per Annum

Per Annum

Before 2002

After 2002

Taxpayer concerned

Rp 1,728,000

Rp 2,880,000

Addition for married Taxpayer

Rp

Rp 1,440,000

864,000

Addition For Wife (income combined with husband)
Addition For Each Full dependant (maximum 3 persons)
1.3.4

Rp 2,880,000
Rp

864,000

Rp 1,440,000

The Structure Of Income Tax Rate
The present rate of Personal income tax is progressive rate with the following

five layers:z

Taxable income < Rp 25 million : 5%3

zTaxable income Rp 25 million - 50 million : 10%z

Taxable income Rp 50 million – 100 million : 15%z

Taxable income Rp 100 million – 200 million : 25%z

Taxable income > Rp 200 million : 35%

While for the corporate income tax rate (effective as from year 2001) is
progressive rate with three layers:

1.3.5

z

Taxable income up to Rp 50 million : 10%z

Taxable income Rp 50million- 100 million : 15%z

Taxable income >Rp 100 million : 30%

Comparison with Other Countries Tax Rate
For comparison use, below are several tax rates of neighboring countries:

Table I.2 Cross-Countries Comparison of Individual Income Tax Rate
Country

LowestHigherRate

Allowance&

Allowance Ratio&

Rate

Rate

Layer

Deduction

Deduction withUS$

Income Per Capita

Indonesia

5%

35%

5

2277

2.9

Malaysia

19%

28%

5

7500

2

Philippines

5%

32%

7

1556

1.5

Thailand1)

0%

37%

6

3852

2

Vietnam2)

10%

50%

5 -

Cambodia3)

0%

20%

5

692

2.3

China

5%

45%

9

5783

6.1

1) Up to baht 50,000-

0% rate is valid2) No allowance for an individual3) Up to CR 500,000

0% rate is Applicable

The table above shows that the maximum nominal rate in Indonesia is higher
than the rate in Philippines, Malaysia and Cambodia. While comparing the corporate
income tax rates for these countries:
Table I.3 Comparison of Corporate Income Tax in Several Countries

Country
Indonesia

Corporate Income Tax Rate10%

Rp 0-50,000,000

15%

Rp 50,000,0001-100,000,000

30%> Rp 100,000,0001

4Malaysia

28%

Non oil

38%

Oil

Philippines

32%

Thailand30%

Vietnam

32%

Domestic and branch

25%

Foreign50%

Oil and Gas

Cambodia

20%

China

9%

For investment incentives

30%

Oil and Gas

30% + 3% Local surtax

Source : Price Waterhouse Coopers, Corporate Taxes 2003
It can be concluded from the table above that many of the sample countries use
a single rate and also almost each country applies a special rate for certain sector, e.g.:the oil sector and foreign businesses. Though the Indonesia highest tax rate (30%) isslightly lower compared to Philippines and Vietnam and slightly higher than Malaysian
tax rate, but still far higher compared to Cambodia.
1.3.6

Indonesia Value Added Tax Performance At A Glance
The graph below describe Value added tax performance compare to the personal

income tax during 1984-2004
Graph 1.1

PIT AND VAT PERFORMANCE 1984-2004

PIT/REV
VAT/REV

YE
AR
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03

70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00

5

While the table below describes the Indonesia VAT Productivity compare tosome neighbor countries.
Table I.4

Comparative Analysis Of the VAT Productivity
CountryStandard

VAT/GDPVAT

VAT Tariff

Ratio

Productivity

Indonesia

10%

4.20%

0.42

Malaysia (*)

5-25%

4.20%

0.42

Philippines

10%

1.60%

0.16

Thailand

10%

2.80%

0.28

Vietnam

0,5,10%

4.00%

0.40

Cambodia

10%

2.90%

0.29

China

17%

3.00%

0.18

(*) Sales VAT(**) Equipment import exemption
Compare to some neighbor countries, Indonesia’s VAT productivity is
considered competitive. Its value is relatively the same with Malaysia and Vietnam,
which is around 0.4. Furthermore, a VAT/GDP ratio which already achieved 4.2%
indicates that the collection of value added tax in Indonesia is relatively effective.

6

CHAPTER 2
METHODOLOGY AND PREVIOUS RESEARCH
2.1 Methodology
This research uses macro data. The potential income tax is calculated using thehousehold survey data and the estimation based on the Pareto distribution.
The Pareto distribution, named after the Italian economics Vilfredo Pareto, is a
power law probability distribution found in a large number of real-world situations.
This distribution is also known, mostly outside economics, as the Bradford distribution.
This distribution is originally used to describe the allocation of wealth amongindividuals since it seemed to show rather well the way that a larger portion of thewealth of any society is owned by a smaller percentage of the people in that society. It
can be seen from the graph below that the probability or the fraction of the populationp(x) that owns a small amount of wealth per person (x) is rather high, and thendecreases steadily as wealth increases.
Graph 2.1

Pareto Distribution Function
Probability density function

Pareto probability density functions for various k with xm = 1. The horizontal axis is the x parameter. Notethat as k->∞ the distribution approaches δ(x − xm).

Cumulative distribution function

7

Pareto cumulative density functions for various k with xm = 1. The horizontal axis is the x parameter.

Under this distribution, if x is the income, and N(x) is the number of individual /household whose income greater than x, the number of household whose income greaterthan x0 can be written as:
N(x0) = ßx-x>x0

The accumulative distribution function and density function are defined as:
F(x) = 1- N(x)/N(x0) = 1-(x/xo)-

x>x0

f(x) =  x0- x-(+1)x> x0There are three scenarios considered for the year 1996 and 2002 data, which are:1) First, calculate the potential tax revenue of the total family income2) Second, input from farming activity is removed from family income, due tothe regulation that agriculture income is not an object of taxation
3) Third, in addition to input from farming, the transfer incomes are also
removed from family income (such as bequest, transfer from children to
parents, etc), since this income also not an object of Personal income tax.
Two methods of calculation are also conducted.
1)

Method 1: simply calculating the potential tax revenue by multiplying
the mean of income for each class with the tax rate applied. Only thehighest income class potential revenue is calculated using the Pareto
distribution.

8

2)

Method 2: calculating all the mean of income for every class, thenmultiply the result with the tax rate applied.

The first method is applied only for the year 2002. For year 1996 the first method
is considered unsuitable since from the data plot the distribution is very left-skewed.
While for the year 2000 calculation, since the national census data do not provide detailabout the mean of income for each class, only method 2 is available to apply.
The calculation result from the above equation will be compared with the data ofcollected tax at the same year. Thus, the compliance rate for each group will be known
and analyzed.
2.2 The Equations
All the calculation is based on the assumption that household structure is with ahousewife and two children. Since there is an increasing in deducted allowances in year
2002 from Rp 1,728,000 and Rp 864,000 for each tax payers and dependants to Rp
2,880,000 and Rp 1,440,000 for each tax payers and dependants, there is a slightly
change in the amount of deductible allowances. For year 1996 and 2000 calculation, theallowance is equal to Rp 4,320,000/year to Rp 7,200,000 for year 2002.
Furthermore, there are five layers progressive rate in the recent tax system:z

Taxable income < Rp 25 million : 5%z

Taxable income Rp 25 million - 50 million : 10%z

Taxable income Rp 50 million – 100 million : 15%z

Taxable income Rp 100 million – 200 million : 25%z

Taxable income > Rp 200 million : 35%

Thus for each scenario, given the amount of deduction and five layers of tax rate,equations below will be applied:
1) For method 1 the tax revenue of the last class is equal to:
Potential tax revenue = Tax 5%=+ Tax 10%(A )+Tax 15% + Tax 25%+ Tax 35%

+

+

(B)

+

(C)

(D)

Since the last class yearly income is more than Rp 36 million then the partial
integration is conducted start from the 10% bracket. Define D as the deductible
allowance, N as the number of household in the last class, For each scenario, given theamount of deduction and five layers of tax rate, equations below will be applied:925million
A = N/ (1- F(x> 36,000,000) ∫5% ( 25,000,000 - D) + 10% ( x – 25,000,000) f(x) dx
0100million
B = N/ (1- F(x> 36,000,000) ∫5% ( 25,000,000 - D) + 10% . 25,000,000) +25million
15%( x-50,000,000) f(x) dx
200million
C = N/ (1- F(x> 36,000,000) ∫5% ( 25,000,000 - D) + 10% . 25,000,000) +100million
15%. 50,000,000 + 25% ( x-100,000,000) f(x) dx
infinite
D = N/ (1- F(x> 36,000,000) ∫5% ( 25,000,000 - D) + 10% . 25,000,000) +200million
15%. 50,000,000 + 25% . 100,000,000 + 35% ( x-200,000,000) f(x) dx
2) For method 2, the mean of income for each class is calculated using the definition ofb
E(X) = 1/F(x) ∫x f(x) dx
awhere x : the value of incomef(x) : the Pareto distribution function
F(x) : the density function at the interval a-b
2.3 Previous Research

There are two previous research correlated has been conducted before.
2.3.1 The IMF Fiscal Affairs Department Report by Sunley, Escolano, et.al (September
1998).
This research was conducted for describing the revenue impact on wage
withholding as a result of personal allowances/deduction change in the personal income
tax. The main step in the estimation is the computation of the number of potential
taxpayers and the distribution of wage income (the potential tax base) across thesetaxpayers. Thus, the result of this estimation is taken for comparison.

10Since there were no statistical data on the distribution of income or the numberof potential taxpayers, this research use the 1996 expenditure survey provided by BPS
to estimate the distribution of wage income. The basic data taken from the survey are :Table 2.1

Distribution of Urban Population by monthly
Per Capita Expenditure, 1996
Expenditure (Rp)

Percent of Population< 15,000

0.028

15,000-20,000

0.127

20,000-30,000

2.842

30,000-40,000

8.389

40,000-60,000

22.90960,000-80,000

19.14580,000-100,000

13.540100,000-150,000

18.229>150,000

14.791

Source:BPS, Expenditure Survey 1996
Next, the lognormal distribution is used for estimating the potential tax revenue.
A continuous lognormal distribution was estimated by non-linear least squares, and thefitted continuous distribution of expenditure was used as a base to compute a
distribution of wage income in 1997/1998. At the end, the nominal amounts in Rupiah
defining the brackets were multiplied by the tax rate and the number of taxpayers.
The idea of lognormal distribution is similar with the Pareto distribution. The
log-normal distribution is often used in simulations of variables such as personal
incomes, age at first marriage, or tolerance to poison in animals. In general, if x is asample from a normal distribution, then y = ex is a sample from a log-normal
distribution. Thus, the log-normal distribution is defined as:

11whereμ is the mean
σ is the standard deviation

2.3.2 The Indonesia-Japan Economic Cooperation Working Team Report (October 2004).
This research used the Susenas data for year 2002 only. The estimation isconducted using a model developed by BAPENAS. But unfortunately, this model is not
mentioned in detail in the report. It is assumed that amount of non-taxable income isfor a family with two children.
There are three scenarios considered, which are:1.

Calculating the total household income and tax based on all types of income2.

The input from farming enterprise is removed from family income

3.

Only public officers’ income (salary and pension) is included in family income, since
this type of income is the easiest to determine.
Below is the conclusion from the calculation:

Table 2.2

Alternative Scenario For Income Tax(2002)(Trillion Rp)
Total Household incomea) Based on all types of income

878.7b) With removal of income from farming

785.2c) Only including public officers salaries

568.1

Total Personal income tax paymenta) Based on all types of income

114.3

12

b) With removal of income from farming

112.3c) Only including public officers salaries

101.3

Percentage of tax free householda) Based on all types of income

33.70%b) With removal of income from farming

48.10%c) Only including public officers salaries

68.10%

Sources: Ikhsan, et.al 200413

CHAPTER 3PERSONAL INCOME TAX IN INDONESIA: REVENUE POTENTIAL
AND THE DISTRIBUTION
3.1 Profile Of Indonesia Tax Revenue
Below are the graph of Indonesia tax ratio development and the table ofIndonesia Tax Revenue. It can be concluded that the ratio of Indonesia tax revenue to
its GDP (Tax ratio) is considered low. Before year 2002, it was less than 10% of the GDP.
Graph 3.1

Tax R)atio (%Indonesia Tax Ratio Development
16
14
12
10
8
6
4
2
0
1980

Tax Ratio(%)

1985

1990 1995
Year

2000

2005

Table 3.1 Indonesia Tax Revenue Developments 1983-2003(in billion Rp)
Year

Tax Revenue

Administration

Other
Cost

Non-oil income Tax

VATLand Tax

Tax

Tax

Total

Ratio%

1983/1984-

1,932.3

830.6

144.9

51.5

2,959.3

3.671

1984/1985-

2,121.0

878.0

180.6

115

3,294.6

3.504

1985/1986-

2,313.0

2,326.7

224.5

151.2

5,015.4

5.024

1986/1987-

2,270.5

2,900.1

190

190.4

5,551.0

4.930

14

1987/1988-

2,663.4

3,390.4

275.1

222.9

6,551.8

4.885

1988/1989-

3,949.4

4,505.3

424.2

292.1

9,171.0

5.894

1989/1990-

5,748.8

5,986.1

604.4

191.1

12,530.4

6.646

1990/1991-

8,250.0

8,119.2

785.8

216.5

17,371.5

8.238

1991/1992-

9,727.0

9,145.9

944.4

298.8

20,116.1

8.047

1992/1993-

12,516.3 10,742.3

1,106.80

252.4

24,617.8

8.718

1993/1994-

14,758.9 13,943.5

1,484.50

283.4

30,470.3

9.240

1994/1995

158.2

18,764.1 16,544.8

1,647.30

301.9

37,258.1

9.748

1995/1996

213.7

21,012.0 18,519.4

1,893.90

452.8

41,878.1

9.214

1996/1997

251.1

27,062.1 20,351.2

2,413.20

590.7

50,417.2

9.467

1997/1998

168.6

34,388.3 25,198.8

2,640.90

477.8

62,705.8

9.990

1998/1999

294.0

55,944.3 27,803.2

3,565.30

413

87,725.8

9.179

1999/2000-

72,729.0 33,087.0

4,107.30

610.9 110,534.2

10.051

2000

334.1

38,421.4 35,231.8

4,456.10

836.7

78,946.0

6.158

2001

516.8

71,474.4 55,957.0

6,662.90

1,383.90 135,478.2

9.087

2002

-

87,200.0 67,800.0

7,530.70

1,455.20 163,985.9

13.100

2003-

106,149.0 80,789.9

9,925.30

2,156.80 199,021.0

13.500As a comparison, neighboring countries which are Philippines, Malaysia,
Thailand, Vietnam, Cambodia and China is chosen since they are considered havecomparable economical and social characteristics. Compare to other sample countries,
Indonesia tax ratio is lower than the average ratio for the neighboring sample countries.
Indonesia tax ratio is only slightly over the Philippines and Cambodia’s tax ratio.
Furthermore, the ratio is lower than Vietnam tax ratio, which share of the
agriculture sector in GDP is higher than Indonesian share. By looking at the economic
characteristics and the tax ratio value below, it can be stated that a country dominatedby the industrial and service sectors but with a low tax ratio may indicates that the
taxation level in the country is relatively low, or its taxation administration system isstill not effective.
Table 3.2 Economic Profile of Neighboring Countries (2002)
GDP Composition (%)
Country

Agriculture

Philippines

14.7

Manufacturing

22.7

Export

GNP/CAP

Tax Ratio

Service% of GDP

(US$)

%

52.8

44.1

1033.712.3

15

Cambodia

35.6

20.2

36.4

44.1

303.1

8.2

China

14.5

44.8

33.7

26.3

951.5

17.2

Malaysia

9.1

30.7

46.4

98.1

3609.5

18.5

Thailand

9

33.8

48.5

52.9

1960

14.5

Vietnam

25

20.6

38.5

46

409.8

15.3

Indonesia

17.5

25

38.1

33.5

779.7

13.1

Average

17.6

28.3

42.1

49.3

1292.5

14.2

The highest

35.6

44.8

52.8

98.1

3609.5

18.5

The Lowest

9

20.2

33.7

26.3

303.1

8.2

3.2 The Estimation Of the Potential Income Tax Revenue
3.2.1 Data
The estimation of potential income tax revenue is conducted for the year 1996,
2000, and 2002. However, since the Susenas data is not available for the year 2000, thecalculation of year 2000 is based on the household structure data by income
classification from the national census.
This estimation focuses on the income potential and the allocation of tax in theindividual income tax system in Indonesia. This assessment refers to the calculation oftax payer incomes from ten thousands of families from the year 1996 and 2002 national
economic and social census (Susenas). Meanwhile, the national census data for year
2000 covers the entire population.
Table below describes the characteristics of household in Indonesia in the 1996
and 2002 Susenas.
Table 3.3

Characteristics of household in Indonesia in 1996 and 2002 SUSENAS
1996

2002

45,477,139

105,543,588

6,628,455

40,449,855

Percentage of household with income from farming

29.756%22.907%

Percentage of total household income from farming

3.921%

8.826%

Percentage of tax free household(zero income tax)

85.425%61.675%

Total Amount of household
Number of potential tax payers

Source: BPS (Central Bureau of Statistic Indonesia)

163.2.2

Method of Calculation
The potential tax revenue calculation is based on the Pareto distribution

estimation. As mentioned before in Chapter 2, this distribution is originally used todescribe the allocation of wealth among individuals since it seemed to show rather well
the way that a larger portion of the wealth of any society is owned by a smaller
percentage of the people in that society. This idea is sometimes expressed more simply
as the Pareto Principle or the "80-20 rule" which says that 20% of the population owns
80% of the wealth.
For the year 1996 and 2002, there are three scenarios considered, which are :z

First, calculating the potential income tax revenue of the total incomezSecond, calculating the potential revenue of the total income without theagriculture income. This scenario is considered since agriculture incomes is
not an object of tax

z

Third, calculating the potential revenue of the total income minus
agriculture income and transfer income ( such as bequest, income fromchildren, etc)

Since the average income and the distribution for every class of income areavailable in the Susenas data, two methods of calculation is applied for year 2002 data,
which are:z

Method 1 : using the average income data for each class and calculating thepotential tax revenue from this average income. While for the last class,potential tax revenue is estimated using Pareto distribution This method is
considered since the last class mean is suspected biased. Under this method
not the average income is estimated, but the potential revenue for this classis directly calculated using the Pareto distribution.

z

Method 2: calculating the mean of income for each class using Pareto
distribution, then calculating the tax revenue by multiplying the mean by
the tax rate.

Table 3.4 below describe the result of potential tax revenue and compliance rate
calculation.

17

Table 3.4

CONCLUSION
Potential Tax Revenue (Rp.)

1996

2000

-

-

2002

Method 1
Calculation For :a) Total household income

265,706,803,406,046

Compliance Rateb) Household income without

8.666%--

income from farming

200,259,536,274,428

Compliance Ratec)Total income-agriculture income- other Y

11.498%--169,013,698,410,672

Compliance Rate

13.624%

Method 2

Calculation For :a) Total household income

97,037,306,015,848

215,366,983,742,668

15.428%10.692%

67,322,474,701,279

Compliance Rate

12.013%b) Household income without-

155,178,516,628,287

65,408,235,860,905

income from farming

12.364%14.839%Compliance Ratec)Total income-agriculture income- other Y-

121,686,156,280,628

28,434,501,603,481

Compliance Rate

28.442%18.923%

There are several point can be concluded from this result :z

For the year 2002, the compliance rate is vary between 8% to 18% using
three scenarios mentioned before. (Compare to the result from Ikshan, et.al(October 2004) that mentioned the potential tax revenue equals to Rp 114.2
trillion and compliance rate equals to 20.14%)zThere are a slightly increasing trend in the compliance rate in the year 2000.
This result mainly caused by the economic recovery after a severe crisis that18

happened in year 1998. Furthermore, since the data used is the national
census data, the calculation can not remove the agriculture income part for
the total household income.
z

For year 1996, there is a significant difference in the compliance rate
between scenario 2 and 3. This result indicates that there is still space toexpand tax revenue by widing the definiton of object of income tax, which
cover also other income.

For comparison use, the calculation results above are being compared toprevious research related and publication by Minister of Finance Indonesia. Table below
summarize the comparison.
Table 3.5

Several Comparison of Compliance Rate Calculation
This Research

Year

IMF

Minister Of Finance

ReportPublication

Ikhsan et.al

1996

2000

2002

1996

2000

2002

Rate

12.013%-28.442%*

15.43%

10.692%-18.923%

20%

11.49%

20.14%

Data

SUSENAS 1996

SUSENAS 2002

Expenditure

Publication of

SUSENAS

Survey 96

Minister Of FinanceCompliance

National
Cencus 2000

MethodParetoParetoParetoLognormal

Distribution

Distribution

Distribution

Distribution

2002

-

*variation in value depends on the method and scenario taken

From the result above, it can be strongly stated that Indonesia tax compliance
rate is low. The tax revenue only covers 11%-20% of the potential value. There is stillwide space for increasing the revenue.
In general an effort to increase the tax revenue can be done by increasing the tax
rate, widening the tax base or increasing the compliance rate. In relation with thecalculation result above, it is also can be stated the there is possibility to increase thetax revenue without increasing the rate. A low compliance rate indicates that by
improving the tax administration or by giving tax education, the compliance rate could
be improved.
According to the directorate general of tax, in year 2001, there are only
7,300,027 taxpayers. This number is equal to 26.1% of total household number of 31.2%

19

of total non-free tax household number. Thus, an effort to broadening the tax base isconsidered urgent and effective for increasing the tax revenue.
Conclusions and several recommendations related to this result will be
discussed in detail in the next two chapters.

20

CHAPTER 4
SEVERAL ISSUES ABOUT THE TAX ADMINISTRATION

4.1 Complicated tax system.
It is a fact that Indonesia current tax system is complicated and there are many
exemptions in several sectors, especially in the area of value added tax. Tax
simplification is perhaps the most important method of limiting opportunity forcorruption and can also increase economic efficiency. Tax reform in several countries
under IMF advice, generally focus on lowering tax rates, broadening the tax base, andeliminating special exemptions. These acts will tend to make tax obligationstransparent and reduce the compliance cost of honest taxpayers. Presumptive taxationof small businesses which may not keep extensive books and record can also reduce thediscretionary power of tax inspectors and make calculations simpler and clearer.
4.2

Efficiency of tax office
As explained in the previous part, Indonesia’s tax compliance rate is consideredlow (less than 20%),while using the year 1984-2004 data, Indonesia tax elasticity is
considered elastic ( 1.43 for Personal Income Tax and 1.15 for VAT). Since Indonesia is a
developing country, it means that in the future there is significant additional potential
tax revenue when the economy grows. Thus, the next issue is how to improve theperformance of the tax revenue collection. Below is the tax collection cost development
since 1995-2001. It shows that the cost used for collecting the tax is considered low(0.38% of the total tax revenue, with tax ratio 11.9%), compare to Japan (1.15%,with tax
ratio 22%) or Singapore (1.65%,with tax ratio 15.4%). Regardless from the issue
whether this collection cost is efficient or not, it can be stated that by spending more forcollecting the cost, there is a possibility to increase the tax revenue.
Table 4.1 Cost of Tax Collection Ratio
Cost Incurred (billion

Tax Revenue

Rp)(billion Rp)

1995/1996

213,7

41.878,1

0,51%

1996/1997

251,1

50.417,2

0,50%

1997/1998

168,6

62.705,8

0,27%

1998/1999

294,087.725,8

0,34%

Year

Ratio (%)

21

1999/2000

N/A

N/A

N/A

2000

334,1

97.484,8

0,34%

2001

516,8

135.478,4

0.38%

Source: Directorate General of Taxes, annual report 2001

Furthermore, table 4.2 and 4.3 below show that the number of submitted tax
returns and registered taxpayer are also low. And taxpayers who fail to submit the tax
return by the dateline will be fined only Rp 100,000 (US$ 11).
Table 4.2 Submission of Annual Tax Return
1998

1999

2000

53,1%

54,7%

36,72%

54,9%

50,7%

32,49%

53,6%

52,6%

N/A

Income Tax Art. 25
Corporate
Income Tax Art. 25
Individual
Income Tax Art. 21

Source: Directorate General of Taxes, annual report 2001

Table 4.3 Registered Taxpayers
Types of Tax

Per

Per

31 Des31 Des2000

2001

808.617873.437845.283

125.201135.338

142.571

22.509524.654551.556598.783635.008

666.325

1.193.899

1.263.993

1.291.906

1.311.582

1.320.157

1.552.816

479.926

523.546548.657

607.066660.736738.326

338.922362.838375.529392.515419.002464.471

Per

Per

Per

Per

1 Jan 1997

1Jan 1998

1 Jan 1999

1 Jan 2000

Income Tax Art. 21

637.586694.187

737.306

Income Tax Art. 22

112.475

118.612

Income Tax Art. 23

477.307

Income Tax Art. 25
Individual
Income Tax Art. 25
Corporate
Value Added Tax

Source: Directorate General of Taxes, annual report 2001

In order to increase the efficiency of tax office, since 2001, the directorate ofgeneral taxes established the Large Taxpayer Offices (LTO), Medium and Small
Taxpayer Offices (MTO), and also the Foreigner Taxpayer Offices (FTO). Furthermore

22the On-line Payment System has been applied in six Land and Building Tax offices
located in Surabaya, East Jakarta, Central Jakarta, West Jakarta, North Jakarta, andSouth Jakarta since August 1999. The system enabled taxpayers to pay taxes (currently
only for land and building taxes) on-line through 162 banks in those cities. The system
is a coordinated work between the Directorate General of Taxes and local governments.
Telephone Information Service Taxpayers (especially land and building taxpayers) may
ask any information related to land and building taxes by using a telephone. PIT has
been applied in 37 of 107 lands and building tax service offices, particularly thoselocated in Java. Currently, PIT is developed by Directorate General of Taxes and third
parties. In Fiscal Year 2002, Directorate General of Taxes has already applied on-line
payment system in District Tax Officers. This development enable taxpayers pay theirtax obligation in more than 80 banks in Indonesia by on-line system program.
4.3

Corruption
Perhaps this is the most important issues in the administration area. Due to thecomplicated tax filling requirement under the current system, there is an excessive
contact between taxpayers and tax officials, thus a chance of corruption increases. An
important instrument to limit this contact could be a relying on withholding taxes andincreasing the use of third-party data for tax assessment. Unfortunately, under thecurrent system, the tax office has no access to the bank records, though tax evasion ishappened and well-proof. Another important act is perhaps the internal and external
checks. Internal audit divisions and anticorruption are considered as the mostimportant bodies in the revenue administrations. In addition, important institution
outside the revenue administration that should be considered include an independentand effective judiciary, external review by government agencies, and taxpayer
associations that could strengthen citizen’s voice.

23

CHAPTER 5
CONCLUSION AND RECOMMENDATION
There are several points that can be concluded from this research:z

It can be strongly stated that the compliance rate of Personal income tax revenue inIndonesia is low. It vary between 8%-18% in year 2002, depends on the scenario
taken.

z

In year 1996 there is a significance difference between the compliance rate underscenario 1(total income), which is equal to 12.364%, and scenario 3 (total income
minus agriculture income and other income), 28.442%. This difference is belief due
to a huge number of other incomes, which were not an object of income tax in year
1996.

z

While in year 2002, the difference between scenario 1 and scenario 3 is around 8%,
compare to 16% in year 1996. This result can be presumed as an impact of money
outflow after the monetary crisis in 1998. Since one of other income is the saving
deposit, which is belief belong to Indonesian- Chinese in majority, there is asignificance decrease in this number of income after year 1998. As a result, thecompliance rate under scenario 1 and 3 does not differ much.

zComparing the compliance rate under scenario 1 (total income), which is equal to10.692% and scenario 2 (total income minus agriculture income), which is equal to14,893%, in year 2002; there is a potential revenue from the agriculture sector thatshould be considered in the future. Taxing the agriculture income politically is not a
popular policy, especially in agriculture country like Indonesia, where more than
50% of population is working in this sector. However, by taxing even a small
number of agriculture incomes, it is expected that an improvement of income in the
future or the possibility of transferring job to other sector, will increase the tax
revenue. In other word, this action is considered in order to broaden the tax baseand compliance rate in the future. Once a person is registered as a taxpayer, it is
become difficult to evade.

z

From the calculation result in year 2002, by taxing the agriculture income, there
will be additional revenue around Rp 60 – 65 trillion. This is equal to three times of
the actual tax revenue in this year. Thus, it can be stated that there is aconsiderable potential tax in the agriculture sector.

z

An effort to increase tax revenue by broadening the tax base is also supported by
the fact from publication of the directorate general of tax in year 2001 about the24

number of taxpayer. There are only 7,300,027 taxpayers from 27,960,516 total
number of household in salary-man/employee category. This number is equal to
only 26.1% of total household number of 31.2% of total non-free tax household
number. Thus, an effort to broadening the tax base is considered urgent andeffective for increasing the tax revenue.
z

There is a need for improvement of tax administration, consist of the tax system,
tax authorities, and taxpayers. Two current two main problems in Indonesia tax
administration:¾

A large compliance gap as a result of weak awareness to pay taxes¾

Leakage in tax imposition and collection due to improper or inadequate
executive actions of the tax authorities.

z

There is a need for introducing the taxpayers’ id number. There is regulation thatevery citizen should have a resident registration number in Indonesia. Thus, thenext issue to consider is how to use this resident registration number as a tool for
registering unrecorded potential taxpayers in the future.

25

APPENDIX

Personal Income Tax Buoyancy
Dependent Variable: LNPIT
Method: Least Squares
Date: 08/10/05

Time: 13:58

Sample: 1984 2004
Included observations: 21
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

-8.865582

0.729784-12.14823

0.0000

LNGDP

1.443397

0.058749

24.56892

0.0000DUMMYCRISIS-0.268622

0.125526-2.139964

0.0472

DUMMYREG-0.050564

0.089763-0.563307

0.5806R-squared

0.991092

Mean dependent var

9.771962

Adjusted R-squared

0.989521

S.D. dependent var

1.392993

S.E. of regression

0.142600

Akaike info criterion-0.887909

Sum squared resid

0.345689

Schwarz criterion-0.688952

Log likelihood

13.32304

F-statistic

630.4984

Durbin-Watson stat1.569869

Prob(F-statistic)

0.00000026

Value Added Tax Buoyancy
Dependent Variable: LNVAT
Method: Least Squares
Date: 08/10/05

Time: 14:00

Sample: 1984 2004
Included observations: 21
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

-8.494115

1.059286-8.018716

0.0000

LNGDP

1.4081710.085274

16.51340

0.0000DUMMYCRISIS-0.618426

0.182202-3.394173

0.0035DUMMYREG-0.340376

0.130291-2.612433

0.0182R-squared

0.976520

Mean dependent var

9.528215

Adjusted R-squared

0.972377

S.D. dependent var

1.245379

S.E. of regression

0.206984

Akaike info criterion-0.142705

Sum squared resid

0.728322

Schwarz criterion

0.056252

Log likelihood

5.498403

F-statistic

235.6776

Durbin-Watson stat1.028741

Prob(F-statistic)

0.00000027