From the jungles of Sumatra and Borneo, to the megalopolises of Java, to the tourist havens of Bali and Lombok, Indonesia is unquestionably the most vast and diverse archipelago on earth. Comprising some 17,000 islands and more than 300 distinct ethnic groups, Indonesian sovereignty has been a concerted effort in uniting remote peoples and places under a common banner and shared identity. Such an immense project has not come without some considerable obstacles. Separatist movements have waxed and waned over the decades, with East Timor suffering a particularly bloody past. Pockets of resistance still remain in the northeastern islands of Maluku and Papua, as well as the western most tip of Sumatra. The last ten years, however, have been some of the most peaceful in modern Indonesian history and the focus, now, has shifted to the immense task of bringing Indonesia’s fiscal infrastructure into the 21st century.
One of the biggest challenges currently faced by the Indonesian government is how to deal with a gapping hole in their tax revenue stream. The fourth most populous nation on earth, Indonesia has a labour force of roughly 120 million workers. Yet despite such a potentially large pool of income taxpayers, only 27 million are actually registered in the system. And of those registered taxpayers, only a small fraction pay the full amount they owe. This means that almost 90% Indonesia’s GDP is produced in a shadow economy and 50% of all possible tax revenue is left uncollected. Indonesia’s tax revenue as a percentage of GDP hovers at a feeble 10%, less than a third of the OECD average.
As the government struggles to generate enough revenue to fulfill its pledges of increased investments in infrastructure, health, and education, it has begun to see a rise in its annual budget deficits. From -0.7% of GDP in 2010, this figure has risen to around -2.5% of GDP in 2016. If it wasn’t for the initiation of a tax amnesty program, the deficit may have bumped up against the -3% legal constitutional limit. The failure of tax revenues to keep up with GDP growth (Indonesia has an extremely low tax buoyancy rate of 0.3%) means that the Indonesian government will have some very difficult fiscal decisions in the near future. Barring an unprecedented uptick in tax compliance, the government may very well have to put some of its more ambitious spending plans on hold.
The obvious long-term solution to Indonesia’s fiscal difficulties is to expand the taxpayer base and increase compliance. Unfortunately, for a country as dispersed and diverse as Indonesia, this is much easier said than done. One attempt to address this was the aforementioned tax amnesty program. In an effort to repatriate capital stored abroad and encourage tax dodgers to come clean, the Indonesian government offered a 9-month tax amnesty.
According to Bawono Kristiaji, a tax analyst at the Indonesian tax consultancy and research firm DDTC, the amnesty program was successful in certain specific areas. “The program has collected 115 trillion rupiah so far [roughly $11.5 billion Canadian]. If we compare this revenue with other amnesty programs around the world, I think ours was quite successful. Also, if we talk about the asset declaration component of the amnesty program, the tax administration will be able to gather a lot of information about the assets of taxpayers, so I believe this could be very useful.”
Unfortunately, in the one area that counted the most, the amnesty program failed to deliver on expectations. According to Kristiaji, “If we look at the total participation in the program, we cannot call this successful. We only brought 40,000 new taxpayers into the system. This only grew the tax base by 0.15%” With the failure of the tax amnesty program to significantly increase the tax base, Kristiaji believes that the government’s best hope is in modernising the tax administration department. Bureaucratic overhaul and updated data sharing would give the government a better picture of its labour force and a robust platform to pursue more effective auditing.
If Indonesia’s only major difficulties in the coming decades revolve around the issues discussed above, then this would have to be considered a major step forward for a country with a violent and divisive past. Yet the enormity of the fiscal challenge ahead cannot be taken lightly by either the government or the hundreds of millions of Indonesia’s citizens. Unless there is a successful overhaul of the entire taxation system, Indonesia will be unable to modernize its outdated infrastructure. In a country where nearly 30 million people live below the poverty line, such a project could not be more important.
Will Westcott is a young traveling journalist