Major Impediments

B. Major Impediments

In addition to factors that helped the tax administration reforms succeed, there were also a number of constraints that have impeded the reform effort over the years. The success of the reforms going forward depends critically on the steps that the Indonesian authorities take to ease these constraints, which include:

Political constraints. Despite strong political support for the reforms from some key officials, there were a number of critical areas where interests at both the executive and

administrative levels within government, as well as powerful interests outside government, were not always aligned with the reforms and inhibited, at times, the implementation of some key initiatives. This was particularly the case with the efforts at overhauling the DGT’s audit program, which to date have produced few results despite being crucial to the tax administration reform strategy. Similarly, the initiative to register additional numbers of high income taxpayers was hindered by the refusal of many third parties, such as professional associations, to provide details about their members to the DGT. When faced with this situation, the DGT itself was reluctant to adopt a firm stance, instead opting to seek legal clarification that was rarely decisive.

Legal and procedural constraints. Legal constraints sometimes obstructed progress on the implementation of reforms. Some reforms required legislative amendment, which inevitably Legal and procedural constraints. Legal constraints sometimes obstructed progress on the implementation of reforms. Some reforms required legislative amendment, which inevitably

Organizational constraints. Operational pressures meant that most key players responsible for designing the reforms were also expected to continue carrying out their regular operational duties, which made it difficult to maintain enthusiasm for the reform program over a prolonged period. From this perspective, a more productive arrangement may have been to create a full-time modernization team and to relieve the staff assigned to this team from other responsibilities. Similarly, the DGT’s policy of mandatory rotation of staff and managers every two years—though largely an anti-corruption measure—greatly impedes the development of expertise as managers are frequently rotated into areas in which they have little or no experience. Finally, the reform effort was further complicated by fragmented implementation responsibilities at headquarters: for example, despite the establishment of a dedicated headquarters team to improve compliance with tax filing obligations, little progress was achieved on this initiative because critical elements were also required to be performed by other departments at headquarters.

Measurement and incentive constraints. Traditionally, the DGT had relied on the annual revenue collection target as the main measure for judging and rewarding the performance of its regional and district directors. This reliance on a narrow measure of performance,

however, created perverse incentives for all sorts of inappropriate practices—including arbitrary audit assessments and delaying the processing of refunds—in order to achieve the assigned collection target. On the other hand, the positive results that were achieved by the revenue generation program—which established targets for each of the DGT’s enforcement programs—demonstrates that substantial gains in tax administration can be realized by setting meaningful and reasonably ambitious performance measures, and holding staff accountable for their achievement.