Introduction Indonesia Value Added Tax V
Introduction Indonesia Value Added Tax (VAT)
Background Tax is one important element in the structure of a state government budget. Through
the tax revenue, the state can continue performing the development to improve the people’s
welfare. Taxes is imposed on every taxpayer and collected to finance a wide range of public
policy. Paying taxes is a form of taxpayer’s participating in development. As breath for the state
budget, the taxation sector is a sector that is always required in raising state revenue. Mishit tax
revenue can affect state’s finance. Up to now, tax revenue has been and will be the main source
of state revenue in APBN, along with the reduction of foreign loan portion and the decreased
revenues from oil and gas. The successful collection of taxes in a country is influenced by
several things. The variety of problems can affect the taxpayers in completing their tax liability.
In taxation policy, one of successful measurements is seen from the high tax compliance in
performing tax obligations in accordance with legitimate regulations. Tax compliance can be
measured at least on the level of compliance to register, report income correctly and deposit the
tax in accordance with predetermined time. If disobedience of taxpayers is accumulated, it will
become a serious problem for state revenue. This happens because Indonesia depends on revenue
from tax sector. According to Evans (2015) in the journal entitled “The Internal Costs of VAT
Compliance: Evidence from Australia and the United Kingdom and Suggestions for Mitigation”,
VAT / GST contributed significantly to total tax revenue, after tax revenue from income tax
sector. Considering the importance of VAT / GST as forms of tax revenue in many countries,
therefore, the tax authorities (in this case the Directorate General of Taxes) must ensure
taxpayers fulfill their obligations to pay taxes. There are some other points affect the compliance
of the taxpayers in their tax obligations. In a study conducted by PricewaterhouseCoopers and
the World Bank since 2007, the unwillingness to pay taxes due to compliance of the taxpayers
themselves and the compliance was influenced by the following factors: total of tax rate, amount
of payment and duration of payment. Lavermicocca and Buchan (2015) in response to corporate
tax payer argued that if companies (taxpayers) had social responsibility to strategic goal, they
would concern about tax compliance. It means that tax 2 noncompliance happened to this point
because of social ignorance of each taxpayer. According Faa (2008) in his research on tax
compliance behavior in Universiti Putera Malaysia, noncompliance tax is always a major
concern in all tax administration. Tax noncompliance, if it is accumulated, it will become a
serious problem to the state revenue. This happens because Indonesian government depends on
revenue from tax sector. Based on the Central Government Financial Report (LKPP) 2014
(audited), tax revenue in Indonesia was around 1,200 trillion rupiahs, while the overall amount of
Indonesia’s income was around 1,600 trillion rupiahs, which means the tax sector is a contributor
to the majority in the income structure of the country (75%). In LKPP in 2013, the condition was
not so different, tax sector contributed state income amounted to 1,000 trillion with total revenue
of the entire country was 1,400 trillion (71.43%). Indonesia has improved the tax sector with
efforts undertaken by Directorate General of Taxes in minimizing the compliance cost through
tax service offices. Tax itself varies in types. One of types is value-added tax. Income from this
value-added tax is significant enough in supporting the target achievement of state tax sector. In
1
some countries, the value-added tax exists in some characteristics i.e. value-added tax, sales tax,
and goods and service tax. In some studies, the characteristic of value-added tax is the same type
of tax and is also a mainstay in favor of tax revenue collected in the country. In general, it can be
concluded that the increase of policy and tax compliance has significant impact on increasing tax
revenues
2
Tax Compliance Indonesia
Tax compliance means the nature of obedient taxpayer in accomplishing tax obligations. In short
sense, tax compliance is adherence to tax obligations. Tax compliance can also mean doing what
is commanded in the tax laws prevailing in a country. Tax compliance can also mean a taxpayer
doing adjustment action toward existing tax regulations. According to Evans in his research,
measuring tax compliance with tax to GDP ratio is the easiest and simplest measurement to be
used although the reliability calculation of GDP is quite difficult since the average for coverage
GDP of each country will be different in the magnitude. However, achievement using these
variables among countries can be quite effective and efficient due to considering also the element
of cost revenue ratio and employee productivity ratio. According Deviano and Rahayu (2006) in
Yeni (2013), tax compliance is a situation where the tax payer met all tax obligations and
performed taxation rights. They define that tax compliance is divided into two kinds, namely:
1. Formal compliance; is a condition where the taxpayers fulfill obligations formally in
accordance with the provision of the Tax Law.
2. Material compliance; is a condition where the taxpayers substantively comply with the
provision of the tax material.
The successful collection of taxes in a country is influenced by other things. A variety of things
can affect the taxpayers in doing their tax liability. In taxation policy, one of successful
measurements is seen from the high tax compliance of taxpayers in performing their taxpayers’
obligations 4 in accordance with the legitimate regulations of taxation. In a country with selfassessment tax system such as in Indonesia, the compliance in obeying tax voluntarily (voluntary
of compliance) was the backbone of the success of the self-assessment system itself (Yeni,
2013). Tax compliance is at least able to be measured from the level of compliance to register, to
report income correctly and to deposit the tax in predetermined time. Andreoni, et. al. (1998 in
Faa, 2008) stated that the issue of tax compliance had been persisting as far as the existence of
the tax itself. This fact explains us that there is a reluctance of taxpayers to meet their tax
obligations. Whilst, continuity of a country is determined by state revenues, which one of the
sources comes from taxes. Furthermore, it may happen a situation when taxpayers are resistance
to pay taxes. When taxpayer do not fulfill their obligations to pay taxes, tax resistance will occur
therein. Tax resistance can be distinguished:
1. Passive resistance This resistance is an obstacle that complicates tax collection and closely
linked to the economic structure.
2. Active resistance Active resistance is apparent in all efforts and actions that are directly
presented to the tax authorities with the aim of avoiding taxes.
Noncompliance of tax may arise when taxpayers either individual or entity thinks about the
merits of paying taxes. Taxation noncompliance can benefit from some prominent sides.
3
Protrude aspect is the reduction of expenditures. This will lead to increase profits naturally. The
decline in expenditure will make the difference with enlarged income. In fact, to comply with all
tax obligations, both individual taxpayers and companies need more effort to do so. The efforts
are started from the calculation of the tax, the deposit of the tax even to the accounting treatment.
Those efforts take a long time. In addition, according to research in 2009 (in International
Finance Corporation, 2011), the accounting for value added tax and income tax is a tax
calculation which is the most time consuming. This effort is converted into cost unit. Compliance
cost that appears to meet the tax obligations of the taxpayer is sometimes too heavy and
cumbersome. On this basis, the taxpayer either individual or entity performs advanced
calculations on the management of compliance costs. A concrete example in everyday life is
when taxpayers receive services from the tax authorities, in this case in Indonesia, namely the
Directorate General of Taxes. If the service takes place in long duration which is time
consuming, then there is actual costs incurred by the taxpayers, it will make taxpayers
themselves less comfortable in the waiting time. This time cost is one of the parts of the
compliance cost. The compliance costs consist of: 5 a. Time cost This means the costs incurred
for the taxpayers awaiting the completion of their tax liability. b. Direct money cost This means
costs directly incurred by taxpayers when the taxpayers resolve their tax liability. c.
Psychological cost This cost is 'cost of mind' and 'cost of stress' for the taxpayers to resolve their
tax obligations. Observing at the events related to noncompliance tax, Pricewaterhouse Coopers
conducted research regarding the payment of taxes in various countries since 2006. According to
research conducted by PricewaterhouseCoopers, tax payment compliance in various countries
was affected by following facts:
• Total tax rate This criterion explains about the amount of the total average of all types of tax
rates in each country.
• Time to comply This criterion explains how long the tax obligations can be completed.
• Numbers of payments This criterion explains how many types of payments that must be made
by the taxpayer in fulfilling all taxation liabilities.
Research conducted by PricewaterhouseCoopers in collaboration with the World Bank examined
these matters in 2015, for fiscal year 2013. This study was conducted in 189 countries on all
continents including Indonesia is being sampled in this study. Some of the facts that we can dig
on average around the world are: - The One-time reduction in number of payment type; - The
decrease in the average of tax rate of 1.3%; and - The reduction of length of time of completion
of tax obligations for 4 hours. Completion of the tax reform issue was also conducted for 379
changes to make tax payments easier and more efficient. 43% of the researched countries also
have system of electronic filing so that these matters can increase tax compliance and then
increase tax revenues.
4
Value-added Tax Indonesia (VAT)
Taxes are levied by the government in various types in accordance with tax object levied. An
objective tax is a kind of tax based on the object with no attention to whom the taxpayers are.
Value added tax is one type of objective tax imposed on many countries. It means that value
added tax is a tax that is not affected by the taxpayers during the tax objects exist in the form of
goods or services subject to tax. Taxable goods or services subject is determined by tax base with
a certain scale. These scales then become tax payable for those who become taxpayers. Valueadded tax in Indonesia is regulated in the Law of the Republic of Indonesia Number 42 of 2009
on Third Amendment to Law Number 8 of 1983 on Value Added Tax on Goods and Services
and Sales Tax on Luxury Goods. According to the Directorate General of Taxes in Constitution
in One Script of VAT and PPnBM (2009), Value Added Tax (VAT) is a tax on consumption of
goods and services in the area of customs imposed in stages in each production line and
distribution line. In accordance with the characteristics of value added tax based on taxation of
the objects with no regard to taxpayers, the same kind characteristics of tax is sales tax, sales tax
of luxury goods, value added tax and goods and services taxes. Countries around the world have
their own ways in determining the type of value-added tax and also in setting the tariff. Sales tax
is a tax levied on the transfer of goods and / or services performed by entrepreneurs in customs
area in company or work environment. Indonesia itself had ever applied this tax, but the levy was
no longer carried out in line with the lifting of Sales Tax Regulations in 1987. The sales tax
which is still in force in Indonesia is Sales Tax on Luxury Goods (PPnBM). PPnBM is a tax
levied on luxury goods undertaken by manufacturers to produce or import the goods in their
business or work activities. This tax is still applied on the basis of:
• The balance of taxation between low and high-income consumers.
• The control of consumption patterns of taxable goods categorized luxury.
• The protection on small consumers.
• The security of state revenue.
5
Goods not subject to VAT
Daily necessities basic to the public need Food and beverages served in hotels, restaurants, cafés,
including both food and beverages consumed on and off the premises, and food and beverages
delivered by a catering business Money, gold and securities Products of mining or drilling taken
directly from source
The following services are not subject to VAT:
• Arts and entertainment
• Educational
• Financial
• Hotel
• Insurance
• Intra-government
• Labour
• Mail services requiring a stamp
• Medical health
• Non-commercial broadcasting
• Parking
• Public transport (land, water, and air)
• Religious
• Social
6
VAT refunds for tourists
A VAT rebate for luxury goods bought in Indonesia is available for tourists at international
airports on the day of departure. Eligibility is restricted to tourists who have stayed in Indonesia
for no longer than two months. Foreign residents are excluded. As this is a relatively recent
programme, most participating retailers are limited to shopping malls in Jakarta and Bali.
Conditions:
Goods must be bought at shops which display a "VAT Refund for Tourists" logo . Tourists must
ask for a VAT rebate (a tax invoice) which is called a faktur pajak . Goods eligible for discount
must total at least Rp500,000 and be listed on one tax invoice. Multiple invoices can be claimed,
but each must have a minimum total of Rp500,000
Excluded goods: food, beverages, tobacco, guns, and goods prohibited on an aircraft
Goods must be purchased within one month of the day of departure from Indonesia
Goods must be carried as accompanied baggage
Claims procedure:
VAT rebates can only be claimed on the date of departure from Indonesia . Declare goods at the
directorate of General Taxes at the airport's tax desk . Submit the original invoice along with the
tax invoice prepared by the retailer .Show an airline ticket and passport
7
The Impact of Value Added Tax to Economic Indonesia
1.1 The Treatment of Capital (Value Added Tax)
Three variations of VAT also arise through different treatments of capital goods. The variations
described here are in terms of the subtraction method of cornputing the VAT base. A gross
product type VAT does not allow purchases of capital goods to be subtracted from a firm’s sales
to determine its tax base. Any part of the VAT assessed to the capital producer’s value added
which he is able to pass on as a higher price is not recoverable by the purchaser through a tax
base reduction matching the purchase price of the capital. An income type VAT reduces the
firm’s tax base in each period by the amount of its capital depreciation in that period or by some
proportion of the capital purchase price. This type is analogous to net national product, a
measure of output which subtracts capital consumed or used-np in producing the gross output or
“value added” for the period. A consumption type \ TAT excludes from the tax base the entire
amount of capital expenditures in the tax period.2 This type is somnewhat more favorable, or
less unfavorable, to investment expenditure than the other two.~The total dollar amounts of tax
base reductions are ultimately the same under both the income and consumption types. However,
under the consumption type, the firm purchasing capital obtains a reduction of the base in the
period in which the capital is purchased. With the income type, the reduction is spread over the
depreciation period. Thus cash available to the firm in the early years of the capital’s use is
greater than under the income type. In general, European countries have adopted the
consumption type.
8
1.2 Rate Variations and Exemptions (Value Added Tax)
Many VAT systems can be described as having a basic rate, special rates for some goods and
services, and exemption status for certain economic activities or specific goods and services.4
These features influence the nation’s aggregate effective tax base, In language used with a VAT,
to be “exempt” means that there is no tax payable on sales and that taxes paid on purchases in
order to provide a good or service are not recoverable from the government. Various categories
of economic activity have been exempted in European countries either to simplify administrative
procedures, as when very small businesses are exempted, or to achieve special effects on prices
and the distribution of real income in the economy. Banking and financial institutions offer
services to which the value-added concept is generally difficult to apply; consequently, these
firms and services are commonly exempted from a VAT. Government and educational services,
medicine, transportation, and communications products and services are also often exempted. In
some countries these and/or other goods and services, considered “necessities,” are instead taxed
at a rate lower than the basic rate, while some items, defined as luxury goods, are taxed at rates
higher than the basic rate. If a firm’s sales are subject to a “zero” or “nil” rate, then not only are
sales free from tax liability, but the firm also is entitled to a refund of taxes listed on the invoices
of purchased inputs. Exports are typically subject to a zero rate in VAT laws and proposals. The
zero rate means that exporters do not pay tax on their sales abroad and receive refunds for taxes
paid on purchases
9
1.3 Issues Concerning the Effects (Value Added Tax)
OF A VAT The consequences of adoption of a VAT, or any tax change, for inflation, income
distribution, resource allocation, economic growth, and a nation’s balance of payments depend
on the specific form of the tax and the accompanying circumnstances. This section of the paper
describes possible effects of a VAT, noting some of the specific aspects of the tax and some of
the conditions in the economy which must be considered in order to reach valid conclusions
about whether those effects will or will not follow the imposition of the tax. The general
categories of considerations discussed are relevant for analysis of the effects of any tax change,
not merely one involving a VAT. One inevitable change in circumstances accompanying any tax
change and bearing on subsequent economic developments is the possible use of new revenues.
New tax revenues may be used by the government:
(1) to purchase goods and services;
(2) to reduce or replace another tax;
(3) to retire outstanding debt;
(4) to hold balances in commercial or central banks. Monetary conditions also influence the
effects sometimes associated with tax policy
Monetary policy and tax policy are often considered separately from each other. Commentators
assessing the impact of one or the other often implicitly assume definitions of these terms which
keep them distinct. One should keep in mind, however, the following relationships between
monetary and tax policy. A decline in money can result from one use of tax revenues —
increasing Treasury balances in commercial or Federal Reserve Banks. Also, increases in the
money stock can finance government expenditures. Additionally, changes in the money stock
have influences over objectives which tax policy often considers — namely, those relating to
inflation, economic growth and stability, income distribution, and the international balance of
payments. While monetary policy and the government budget are not the only influences on
these matters, both are significant
10
1.4 Inflation
The possibility of increases in the average price of goods and services upon enactment of a VAT
has been a concern of Europeans, even though for some countries the VAT replaced a similar tax
known as a turnover tax. For example, in the past year France reduced its VAT rates, along with
other measures, reportedly for the purpose of combatting inflation. Imposition of a VAT or a
change in any tax rate, by itself, cannot be considered inflationary or deflationary. Even if sellers
were able to raise prices to cover the tax they pay, this would constitute a onetime increase in
their prices, but would not necessarily lead to inflation, which is a continuous increase in the
average of prices over time. Even associating a one-time increase in the level of prices with a tax
change would be accurate only under special circumstances. A tax on a single good could often
be expected to raise the price of that good and perhaps affect prices of related goods and
services.5 However, a rise in the general price level cannot be mnaintained unless there is a rise
in the dollar amount of goods and services demanded relative to output. Assuming no decline in
output, this would require either expansion in the money stock or decline in the public’s holdings
of real money balances.° If there were neither a rise in the money stock nor an increase in the
rate of money turnover, buyers would be unable to make all of their previous purchases at higher
prices. A result of a widespread attempt to raise prices would be reduction in the real amount of
goods and services sold, rollbacks in some prices, and/or adjustments in production and
employment. Consequently, if a rise in the price level is sustained with the imposition of a VAT
or other tax change, it is largely because of one or more of the following: the tax has induced the
monetary authorities to increase the money stock; the tax has induced the public to attempt to
reduce their holdings of money balances; or the tax has acted as a disincentive to production
11
1.4 Income Distribution from Value Added Tax
Many believe a VAT to be a regressive tax — one which takes a larger proportion of lower
incomes than high ones. An appropriate analysis of the effects of a tax on income distribution
requires consideration of the specific form of the tax — including its rates and exemptions —
and the use of the revenues, Consideration of how these in turn affect income distribution is
rather complex. To illustrate, Great Britain replaced selective employment and special purchase
taxes with a VAT, effective April 1, 1973. This VAT has a basic rate of 10 percent and a zero
rate on some items, including food, housing, fuel, power, and passenger transport. Under the
special purchase taxes which were replaced, some luxury items were taxed at a rate of 25 percent
while many items purchased more universally were taxed at rates lower than 10 percent. The
effect of this tax substitution on income distribution is contingent on how prices of commodities
respond to the elimination of one tax and the imposition of the other. The substitution would
usually be considered regressive if prices of items purchased predominately by lower income
households rise relative to prices of purchases made by higher income households. The
assumption, often made, that prices respond in direct proportion to the tax change is usually
unwarranted.7 The income distribution effect of adoption of a consumption type VAT in the U.S.
would depend on a number of circumstances including, of course, its rates and exemptions. The
use of revenues — for example, whether they were used to reduce or eliminate corporate income
taxes, social security taxes, or property taxes, or whether they were used to increase government
spending — would help determine the distribution of real income after the tax change. In
addition, accompanying monetary conditions would influence the behavior of prices, which, in
turn, affects the distribution of real income
12
1.5 Economic Growth From Value Added Tax
One objective apparent in discussions concerning taxation is that the tax system encourage or at
least not impair the economy’s potential for and achievement of economic growth. What, then,
are some of the possible consequences of a VAT on growth? Once again it depends to some
extent on the policy actions accompanying the VAT and responses to these actions. In general
we need to ask whether the private sector responds to a given tax substitution or increase by:
(1) reducing consumption;
(2) reducing investment;
(3) increasing the supply of productive resources to the market. Response
(4) appears conducive to growth. However, for the growth impact of response
(5) to be lasting, there must be balance between demand and the resulting increase in the supplies of
goods. Slack in demand resulting in accumulations of unsold goods is a signal for a production cutback
(and/or a price decline) in a market economy.
In general, policies conducive to growth are those which increase supplies of productive
resources and investment and those which foster conditions in which an essential balance
between aggregate supplies and demands can he maintained. The combination of responses (1),
(2), and (3) to adoption of a VAT is influenced by how the VAT, the accompanying use of funds,
and monetary conditions affect prices of current versus future consumption8 and the conditions
which lead resource owners to hold or release their resources to the market. If monetary
conditions (rates of money stock growth and money turnover) do not change, relative prices will
reflect the impact on prices of the tax for which the VAT was substituted or the spending
undertaken by the government. A lowering of the relative price of future consumption would in
many circumstances be conducive to growth of production in the economy.
13
1.6 Balance of Payments From Value Added Tax
A VAT, as opposed to some other taxes, is considered advantageous to an individual country’s
balance of trade. Provisions of the General Agreement on Tariffs and Trade (GATT) foster this
effect. GATT permits a rebate of indirect taxes, such as a VAT or sales tax, on exports so that the
destination price of the export svill exclude the tax, but does not permit the effect of direct taxes,
such as the corporate income tax, to be excluded from the export price. In addition, GATT
allows a border tax on imports equivalent to the importing country’s indirect tax. If direct taxes
have a positive effect on the prices of commodities, which is reversed with elimination of the tax,
the substitution of an indirect tax, such as a VAT, for a direct tax would tend to increase a
nation’s exports and reduce its imports, given that other factors affecting trade remain
substantially the same. This is because the price to foreigners could be more attractive within a
framework imposing a VAT than one involving direct tax.
14
Conclusion
This topic has discussed the concept of a value added tax. Its main purpose, however, has been to
illustrate some of the necessary, but often overlooked, ingredients for analysis of any tax
proposal. To analyze the consequences of any tax change, the accompanying monetary
conditions and the change in the amount of one or more of the possible uses of the revenues must
be considered. Two basic points made in this topic are:
(1) the consequences for income distribution, economic growth, and the international balance of
payments of a VAT substitution in the tax structure depend largely on what happens to prices
(2) the effects on prices of the imposition of a VAT in place of another tax depend to a
considerable extent on monetary conditions the rate of growth of the money supply and the
velocity of money and on the price-impact of an alternative tax or other use of funds.
In contrast to some widely alleged consequences of a VAT, it is noted that a VAT need not be
followed by inflation or greater inequality of income distribution.
15
16
Background Tax is one important element in the structure of a state government budget. Through
the tax revenue, the state can continue performing the development to improve the people’s
welfare. Taxes is imposed on every taxpayer and collected to finance a wide range of public
policy. Paying taxes is a form of taxpayer’s participating in development. As breath for the state
budget, the taxation sector is a sector that is always required in raising state revenue. Mishit tax
revenue can affect state’s finance. Up to now, tax revenue has been and will be the main source
of state revenue in APBN, along with the reduction of foreign loan portion and the decreased
revenues from oil and gas. The successful collection of taxes in a country is influenced by
several things. The variety of problems can affect the taxpayers in completing their tax liability.
In taxation policy, one of successful measurements is seen from the high tax compliance in
performing tax obligations in accordance with legitimate regulations. Tax compliance can be
measured at least on the level of compliance to register, report income correctly and deposit the
tax in accordance with predetermined time. If disobedience of taxpayers is accumulated, it will
become a serious problem for state revenue. This happens because Indonesia depends on revenue
from tax sector. According to Evans (2015) in the journal entitled “The Internal Costs of VAT
Compliance: Evidence from Australia and the United Kingdom and Suggestions for Mitigation”,
VAT / GST contributed significantly to total tax revenue, after tax revenue from income tax
sector. Considering the importance of VAT / GST as forms of tax revenue in many countries,
therefore, the tax authorities (in this case the Directorate General of Taxes) must ensure
taxpayers fulfill their obligations to pay taxes. There are some other points affect the compliance
of the taxpayers in their tax obligations. In a study conducted by PricewaterhouseCoopers and
the World Bank since 2007, the unwillingness to pay taxes due to compliance of the taxpayers
themselves and the compliance was influenced by the following factors: total of tax rate, amount
of payment and duration of payment. Lavermicocca and Buchan (2015) in response to corporate
tax payer argued that if companies (taxpayers) had social responsibility to strategic goal, they
would concern about tax compliance. It means that tax 2 noncompliance happened to this point
because of social ignorance of each taxpayer. According Faa (2008) in his research on tax
compliance behavior in Universiti Putera Malaysia, noncompliance tax is always a major
concern in all tax administration. Tax noncompliance, if it is accumulated, it will become a
serious problem to the state revenue. This happens because Indonesian government depends on
revenue from tax sector. Based on the Central Government Financial Report (LKPP) 2014
(audited), tax revenue in Indonesia was around 1,200 trillion rupiahs, while the overall amount of
Indonesia’s income was around 1,600 trillion rupiahs, which means the tax sector is a contributor
to the majority in the income structure of the country (75%). In LKPP in 2013, the condition was
not so different, tax sector contributed state income amounted to 1,000 trillion with total revenue
of the entire country was 1,400 trillion (71.43%). Indonesia has improved the tax sector with
efforts undertaken by Directorate General of Taxes in minimizing the compliance cost through
tax service offices. Tax itself varies in types. One of types is value-added tax. Income from this
value-added tax is significant enough in supporting the target achievement of state tax sector. In
1
some countries, the value-added tax exists in some characteristics i.e. value-added tax, sales tax,
and goods and service tax. In some studies, the characteristic of value-added tax is the same type
of tax and is also a mainstay in favor of tax revenue collected in the country. In general, it can be
concluded that the increase of policy and tax compliance has significant impact on increasing tax
revenues
2
Tax Compliance Indonesia
Tax compliance means the nature of obedient taxpayer in accomplishing tax obligations. In short
sense, tax compliance is adherence to tax obligations. Tax compliance can also mean doing what
is commanded in the tax laws prevailing in a country. Tax compliance can also mean a taxpayer
doing adjustment action toward existing tax regulations. According to Evans in his research,
measuring tax compliance with tax to GDP ratio is the easiest and simplest measurement to be
used although the reliability calculation of GDP is quite difficult since the average for coverage
GDP of each country will be different in the magnitude. However, achievement using these
variables among countries can be quite effective and efficient due to considering also the element
of cost revenue ratio and employee productivity ratio. According Deviano and Rahayu (2006) in
Yeni (2013), tax compliance is a situation where the tax payer met all tax obligations and
performed taxation rights. They define that tax compliance is divided into two kinds, namely:
1. Formal compliance; is a condition where the taxpayers fulfill obligations formally in
accordance with the provision of the Tax Law.
2. Material compliance; is a condition where the taxpayers substantively comply with the
provision of the tax material.
The successful collection of taxes in a country is influenced by other things. A variety of things
can affect the taxpayers in doing their tax liability. In taxation policy, one of successful
measurements is seen from the high tax compliance of taxpayers in performing their taxpayers’
obligations 4 in accordance with the legitimate regulations of taxation. In a country with selfassessment tax system such as in Indonesia, the compliance in obeying tax voluntarily (voluntary
of compliance) was the backbone of the success of the self-assessment system itself (Yeni,
2013). Tax compliance is at least able to be measured from the level of compliance to register, to
report income correctly and to deposit the tax in predetermined time. Andreoni, et. al. (1998 in
Faa, 2008) stated that the issue of tax compliance had been persisting as far as the existence of
the tax itself. This fact explains us that there is a reluctance of taxpayers to meet their tax
obligations. Whilst, continuity of a country is determined by state revenues, which one of the
sources comes from taxes. Furthermore, it may happen a situation when taxpayers are resistance
to pay taxes. When taxpayer do not fulfill their obligations to pay taxes, tax resistance will occur
therein. Tax resistance can be distinguished:
1. Passive resistance This resistance is an obstacle that complicates tax collection and closely
linked to the economic structure.
2. Active resistance Active resistance is apparent in all efforts and actions that are directly
presented to the tax authorities with the aim of avoiding taxes.
Noncompliance of tax may arise when taxpayers either individual or entity thinks about the
merits of paying taxes. Taxation noncompliance can benefit from some prominent sides.
3
Protrude aspect is the reduction of expenditures. This will lead to increase profits naturally. The
decline in expenditure will make the difference with enlarged income. In fact, to comply with all
tax obligations, both individual taxpayers and companies need more effort to do so. The efforts
are started from the calculation of the tax, the deposit of the tax even to the accounting treatment.
Those efforts take a long time. In addition, according to research in 2009 (in International
Finance Corporation, 2011), the accounting for value added tax and income tax is a tax
calculation which is the most time consuming. This effort is converted into cost unit. Compliance
cost that appears to meet the tax obligations of the taxpayer is sometimes too heavy and
cumbersome. On this basis, the taxpayer either individual or entity performs advanced
calculations on the management of compliance costs. A concrete example in everyday life is
when taxpayers receive services from the tax authorities, in this case in Indonesia, namely the
Directorate General of Taxes. If the service takes place in long duration which is time
consuming, then there is actual costs incurred by the taxpayers, it will make taxpayers
themselves less comfortable in the waiting time. This time cost is one of the parts of the
compliance cost. The compliance costs consist of: 5 a. Time cost This means the costs incurred
for the taxpayers awaiting the completion of their tax liability. b. Direct money cost This means
costs directly incurred by taxpayers when the taxpayers resolve their tax liability. c.
Psychological cost This cost is 'cost of mind' and 'cost of stress' for the taxpayers to resolve their
tax obligations. Observing at the events related to noncompliance tax, Pricewaterhouse Coopers
conducted research regarding the payment of taxes in various countries since 2006. According to
research conducted by PricewaterhouseCoopers, tax payment compliance in various countries
was affected by following facts:
• Total tax rate This criterion explains about the amount of the total average of all types of tax
rates in each country.
• Time to comply This criterion explains how long the tax obligations can be completed.
• Numbers of payments This criterion explains how many types of payments that must be made
by the taxpayer in fulfilling all taxation liabilities.
Research conducted by PricewaterhouseCoopers in collaboration with the World Bank examined
these matters in 2015, for fiscal year 2013. This study was conducted in 189 countries on all
continents including Indonesia is being sampled in this study. Some of the facts that we can dig
on average around the world are: - The One-time reduction in number of payment type; - The
decrease in the average of tax rate of 1.3%; and - The reduction of length of time of completion
of tax obligations for 4 hours. Completion of the tax reform issue was also conducted for 379
changes to make tax payments easier and more efficient. 43% of the researched countries also
have system of electronic filing so that these matters can increase tax compliance and then
increase tax revenues.
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Value-added Tax Indonesia (VAT)
Taxes are levied by the government in various types in accordance with tax object levied. An
objective tax is a kind of tax based on the object with no attention to whom the taxpayers are.
Value added tax is one type of objective tax imposed on many countries. It means that value
added tax is a tax that is not affected by the taxpayers during the tax objects exist in the form of
goods or services subject to tax. Taxable goods or services subject is determined by tax base with
a certain scale. These scales then become tax payable for those who become taxpayers. Valueadded tax in Indonesia is regulated in the Law of the Republic of Indonesia Number 42 of 2009
on Third Amendment to Law Number 8 of 1983 on Value Added Tax on Goods and Services
and Sales Tax on Luxury Goods. According to the Directorate General of Taxes in Constitution
in One Script of VAT and PPnBM (2009), Value Added Tax (VAT) is a tax on consumption of
goods and services in the area of customs imposed in stages in each production line and
distribution line. In accordance with the characteristics of value added tax based on taxation of
the objects with no regard to taxpayers, the same kind characteristics of tax is sales tax, sales tax
of luxury goods, value added tax and goods and services taxes. Countries around the world have
their own ways in determining the type of value-added tax and also in setting the tariff. Sales tax
is a tax levied on the transfer of goods and / or services performed by entrepreneurs in customs
area in company or work environment. Indonesia itself had ever applied this tax, but the levy was
no longer carried out in line with the lifting of Sales Tax Regulations in 1987. The sales tax
which is still in force in Indonesia is Sales Tax on Luxury Goods (PPnBM). PPnBM is a tax
levied on luxury goods undertaken by manufacturers to produce or import the goods in their
business or work activities. This tax is still applied on the basis of:
• The balance of taxation between low and high-income consumers.
• The control of consumption patterns of taxable goods categorized luxury.
• The protection on small consumers.
• The security of state revenue.
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Goods not subject to VAT
Daily necessities basic to the public need Food and beverages served in hotels, restaurants, cafés,
including both food and beverages consumed on and off the premises, and food and beverages
delivered by a catering business Money, gold and securities Products of mining or drilling taken
directly from source
The following services are not subject to VAT:
• Arts and entertainment
• Educational
• Financial
• Hotel
• Insurance
• Intra-government
• Labour
• Mail services requiring a stamp
• Medical health
• Non-commercial broadcasting
• Parking
• Public transport (land, water, and air)
• Religious
• Social
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VAT refunds for tourists
A VAT rebate for luxury goods bought in Indonesia is available for tourists at international
airports on the day of departure. Eligibility is restricted to tourists who have stayed in Indonesia
for no longer than two months. Foreign residents are excluded. As this is a relatively recent
programme, most participating retailers are limited to shopping malls in Jakarta and Bali.
Conditions:
Goods must be bought at shops which display a "VAT Refund for Tourists" logo . Tourists must
ask for a VAT rebate (a tax invoice) which is called a faktur pajak . Goods eligible for discount
must total at least Rp500,000 and be listed on one tax invoice. Multiple invoices can be claimed,
but each must have a minimum total of Rp500,000
Excluded goods: food, beverages, tobacco, guns, and goods prohibited on an aircraft
Goods must be purchased within one month of the day of departure from Indonesia
Goods must be carried as accompanied baggage
Claims procedure:
VAT rebates can only be claimed on the date of departure from Indonesia . Declare goods at the
directorate of General Taxes at the airport's tax desk . Submit the original invoice along with the
tax invoice prepared by the retailer .Show an airline ticket and passport
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The Impact of Value Added Tax to Economic Indonesia
1.1 The Treatment of Capital (Value Added Tax)
Three variations of VAT also arise through different treatments of capital goods. The variations
described here are in terms of the subtraction method of cornputing the VAT base. A gross
product type VAT does not allow purchases of capital goods to be subtracted from a firm’s sales
to determine its tax base. Any part of the VAT assessed to the capital producer’s value added
which he is able to pass on as a higher price is not recoverable by the purchaser through a tax
base reduction matching the purchase price of the capital. An income type VAT reduces the
firm’s tax base in each period by the amount of its capital depreciation in that period or by some
proportion of the capital purchase price. This type is analogous to net national product, a
measure of output which subtracts capital consumed or used-np in producing the gross output or
“value added” for the period. A consumption type \ TAT excludes from the tax base the entire
amount of capital expenditures in the tax period.2 This type is somnewhat more favorable, or
less unfavorable, to investment expenditure than the other two.~The total dollar amounts of tax
base reductions are ultimately the same under both the income and consumption types. However,
under the consumption type, the firm purchasing capital obtains a reduction of the base in the
period in which the capital is purchased. With the income type, the reduction is spread over the
depreciation period. Thus cash available to the firm in the early years of the capital’s use is
greater than under the income type. In general, European countries have adopted the
consumption type.
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1.2 Rate Variations and Exemptions (Value Added Tax)
Many VAT systems can be described as having a basic rate, special rates for some goods and
services, and exemption status for certain economic activities or specific goods and services.4
These features influence the nation’s aggregate effective tax base, In language used with a VAT,
to be “exempt” means that there is no tax payable on sales and that taxes paid on purchases in
order to provide a good or service are not recoverable from the government. Various categories
of economic activity have been exempted in European countries either to simplify administrative
procedures, as when very small businesses are exempted, or to achieve special effects on prices
and the distribution of real income in the economy. Banking and financial institutions offer
services to which the value-added concept is generally difficult to apply; consequently, these
firms and services are commonly exempted from a VAT. Government and educational services,
medicine, transportation, and communications products and services are also often exempted. In
some countries these and/or other goods and services, considered “necessities,” are instead taxed
at a rate lower than the basic rate, while some items, defined as luxury goods, are taxed at rates
higher than the basic rate. If a firm’s sales are subject to a “zero” or “nil” rate, then not only are
sales free from tax liability, but the firm also is entitled to a refund of taxes listed on the invoices
of purchased inputs. Exports are typically subject to a zero rate in VAT laws and proposals. The
zero rate means that exporters do not pay tax on their sales abroad and receive refunds for taxes
paid on purchases
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1.3 Issues Concerning the Effects (Value Added Tax)
OF A VAT The consequences of adoption of a VAT, or any tax change, for inflation, income
distribution, resource allocation, economic growth, and a nation’s balance of payments depend
on the specific form of the tax and the accompanying circumnstances. This section of the paper
describes possible effects of a VAT, noting some of the specific aspects of the tax and some of
the conditions in the economy which must be considered in order to reach valid conclusions
about whether those effects will or will not follow the imposition of the tax. The general
categories of considerations discussed are relevant for analysis of the effects of any tax change,
not merely one involving a VAT. One inevitable change in circumstances accompanying any tax
change and bearing on subsequent economic developments is the possible use of new revenues.
New tax revenues may be used by the government:
(1) to purchase goods and services;
(2) to reduce or replace another tax;
(3) to retire outstanding debt;
(4) to hold balances in commercial or central banks. Monetary conditions also influence the
effects sometimes associated with tax policy
Monetary policy and tax policy are often considered separately from each other. Commentators
assessing the impact of one or the other often implicitly assume definitions of these terms which
keep them distinct. One should keep in mind, however, the following relationships between
monetary and tax policy. A decline in money can result from one use of tax revenues —
increasing Treasury balances in commercial or Federal Reserve Banks. Also, increases in the
money stock can finance government expenditures. Additionally, changes in the money stock
have influences over objectives which tax policy often considers — namely, those relating to
inflation, economic growth and stability, income distribution, and the international balance of
payments. While monetary policy and the government budget are not the only influences on
these matters, both are significant
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1.4 Inflation
The possibility of increases in the average price of goods and services upon enactment of a VAT
has been a concern of Europeans, even though for some countries the VAT replaced a similar tax
known as a turnover tax. For example, in the past year France reduced its VAT rates, along with
other measures, reportedly for the purpose of combatting inflation. Imposition of a VAT or a
change in any tax rate, by itself, cannot be considered inflationary or deflationary. Even if sellers
were able to raise prices to cover the tax they pay, this would constitute a onetime increase in
their prices, but would not necessarily lead to inflation, which is a continuous increase in the
average of prices over time. Even associating a one-time increase in the level of prices with a tax
change would be accurate only under special circumstances. A tax on a single good could often
be expected to raise the price of that good and perhaps affect prices of related goods and
services.5 However, a rise in the general price level cannot be mnaintained unless there is a rise
in the dollar amount of goods and services demanded relative to output. Assuming no decline in
output, this would require either expansion in the money stock or decline in the public’s holdings
of real money balances.° If there were neither a rise in the money stock nor an increase in the
rate of money turnover, buyers would be unable to make all of their previous purchases at higher
prices. A result of a widespread attempt to raise prices would be reduction in the real amount of
goods and services sold, rollbacks in some prices, and/or adjustments in production and
employment. Consequently, if a rise in the price level is sustained with the imposition of a VAT
or other tax change, it is largely because of one or more of the following: the tax has induced the
monetary authorities to increase the money stock; the tax has induced the public to attempt to
reduce their holdings of money balances; or the tax has acted as a disincentive to production
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1.4 Income Distribution from Value Added Tax
Many believe a VAT to be a regressive tax — one which takes a larger proportion of lower
incomes than high ones. An appropriate analysis of the effects of a tax on income distribution
requires consideration of the specific form of the tax — including its rates and exemptions —
and the use of the revenues, Consideration of how these in turn affect income distribution is
rather complex. To illustrate, Great Britain replaced selective employment and special purchase
taxes with a VAT, effective April 1, 1973. This VAT has a basic rate of 10 percent and a zero
rate on some items, including food, housing, fuel, power, and passenger transport. Under the
special purchase taxes which were replaced, some luxury items were taxed at a rate of 25 percent
while many items purchased more universally were taxed at rates lower than 10 percent. The
effect of this tax substitution on income distribution is contingent on how prices of commodities
respond to the elimination of one tax and the imposition of the other. The substitution would
usually be considered regressive if prices of items purchased predominately by lower income
households rise relative to prices of purchases made by higher income households. The
assumption, often made, that prices respond in direct proportion to the tax change is usually
unwarranted.7 The income distribution effect of adoption of a consumption type VAT in the U.S.
would depend on a number of circumstances including, of course, its rates and exemptions. The
use of revenues — for example, whether they were used to reduce or eliminate corporate income
taxes, social security taxes, or property taxes, or whether they were used to increase government
spending — would help determine the distribution of real income after the tax change. In
addition, accompanying monetary conditions would influence the behavior of prices, which, in
turn, affects the distribution of real income
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1.5 Economic Growth From Value Added Tax
One objective apparent in discussions concerning taxation is that the tax system encourage or at
least not impair the economy’s potential for and achievement of economic growth. What, then,
are some of the possible consequences of a VAT on growth? Once again it depends to some
extent on the policy actions accompanying the VAT and responses to these actions. In general
we need to ask whether the private sector responds to a given tax substitution or increase by:
(1) reducing consumption;
(2) reducing investment;
(3) increasing the supply of productive resources to the market. Response
(4) appears conducive to growth. However, for the growth impact of response
(5) to be lasting, there must be balance between demand and the resulting increase in the supplies of
goods. Slack in demand resulting in accumulations of unsold goods is a signal for a production cutback
(and/or a price decline) in a market economy.
In general, policies conducive to growth are those which increase supplies of productive
resources and investment and those which foster conditions in which an essential balance
between aggregate supplies and demands can he maintained. The combination of responses (1),
(2), and (3) to adoption of a VAT is influenced by how the VAT, the accompanying use of funds,
and monetary conditions affect prices of current versus future consumption8 and the conditions
which lead resource owners to hold or release their resources to the market. If monetary
conditions (rates of money stock growth and money turnover) do not change, relative prices will
reflect the impact on prices of the tax for which the VAT was substituted or the spending
undertaken by the government. A lowering of the relative price of future consumption would in
many circumstances be conducive to growth of production in the economy.
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1.6 Balance of Payments From Value Added Tax
A VAT, as opposed to some other taxes, is considered advantageous to an individual country’s
balance of trade. Provisions of the General Agreement on Tariffs and Trade (GATT) foster this
effect. GATT permits a rebate of indirect taxes, such as a VAT or sales tax, on exports so that the
destination price of the export svill exclude the tax, but does not permit the effect of direct taxes,
such as the corporate income tax, to be excluded from the export price. In addition, GATT
allows a border tax on imports equivalent to the importing country’s indirect tax. If direct taxes
have a positive effect on the prices of commodities, which is reversed with elimination of the tax,
the substitution of an indirect tax, such as a VAT, for a direct tax would tend to increase a
nation’s exports and reduce its imports, given that other factors affecting trade remain
substantially the same. This is because the price to foreigners could be more attractive within a
framework imposing a VAT than one involving direct tax.
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Conclusion
This topic has discussed the concept of a value added tax. Its main purpose, however, has been to
illustrate some of the necessary, but often overlooked, ingredients for analysis of any tax
proposal. To analyze the consequences of any tax change, the accompanying monetary
conditions and the change in the amount of one or more of the possible uses of the revenues must
be considered. Two basic points made in this topic are:
(1) the consequences for income distribution, economic growth, and the international balance of
payments of a VAT substitution in the tax structure depend largely on what happens to prices
(2) the effects on prices of the imposition of a VAT in place of another tax depend to a
considerable extent on monetary conditions the rate of growth of the money supply and the
velocity of money and on the price-impact of an alternative tax or other use of funds.
In contrast to some widely alleged consequences of a VAT, it is noted that a VAT need not be
followed by inflation or greater inequality of income distribution.
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