Indonesia jails tax dodgers to meet budget goals

Sri Mulyani Indrawati, Indonesia's finance minister, speaks during the 50th Asian Development Bank (ADB) Annual Meeting in Yokohama, Japan, on Thursday, May 4, 2017. (Bloomberg/Kiyoshi Ota)

In the Dutch language, gijzeling means to take someone hostage. In Indonesia, that’s how authorities describe their strategy to deal with tax dodgers, throwing dozens of people in jail as part of a national crackdown.

Eight months after the government closed an amnesty programme that gave Indonesians a chance to come clean on their tax affairs, it’s taking aggressive action to deal with those who still haven’t paid up. Finance Minister Sri Mulyani Indrawati makes no apologies as she races to meet a 1,473 trillion rupiah (108 billion dollars) tax revenue target with just two months to go before the end of the financial year.

Where “compliance is very minimal, or there is no cooperation, we will start to do this gijzeling,” Indrawati said in an interview in Jakarta. Taxpayers were given fair warning, including an opportunity to participate in the amnesty, she said.

More than 50 people, including foreign nationals, have been imprisoned since the beginning of the year over unpaid taxes, while hundreds more have been banned from travelling overseas. The tax office has threatened to seize luxury cars like Ferraris and jet-setters returning home with Gucci and Prada handbags have been stopped by customs officials at airports and questioned about whether their purchases abroad have been properly declared.

Yon Arsal, head of compliance and revenue at the Tax Director-General’s office, said his officers are doubling down on efforts to make up a shortfall of almost 600 trillion rupiah for this year. As of September 30, they had collected 60 percent, or 876 trillion rupiah, of the 2017 target. Excluding flows from the amnesty, tax receipts are up about 12 percent compared to the same period last year, he said.

“We still have two months left and we are really focusing on compliance activities,” he said in an interview in Jakarta. “It is quite challenging for us. I won’t say that it is an easy jump.”

Low Tax Ratios

Indonesia has a long-standing problem with tax compliance. In a country of 260 million people, only about 16 million registered taxpayers were required to submit returns this year. Of those, only 11.3 million have actually paid their dues, official figures show.

The country also has one of the lowest tax ratios in the region. The government is forecasting tax revenue of 11 percent of gross domestic product this year and expects that to rise to 13-14 percent by 2021, down from a previous goal of 16 percent by 2019. That compares with 17 percent in the Philippines, 15 percent in Malaysia and an average of about 34 percent for countries in the Organisation for Economic Co-operation and Development.

In the first 10 months of the year, Indonesia temporarily jailed 53 people for failing to pay arrears, the Tax Directorate-General’s office said, without naming the people. Forty-five of them have since been released after paying up 230 billion rupiah, while eight remain behind bars, owing a collective 41 billion rupiah. Authorities are looking to detain another 23 people who owe a total of 1.8 trillion rupiah.

Death-Row Prison

One of the people jailed in July was a recalcitrant taxpayer with shares in a company that mines gold and silver, according to the tax office. He was held “hostage” for 16 hours at a prison in central Jakarta that also houses inmates on death row. Identified only as EB, the person paid 2.4 billion rupiah in unpaid taxes before leaving the Salemba jail, located about five kilometres (3.1 miles) from the Finance Ministry.

The strategy of locking people up is a “last resort,” but has “been done for many, many years and it’s quite effective," Arsal said.

Seizing assets, like luxury cars, is a more complicated process.

“If we see people who have the Lamborghini or Ferrari, then the first step is we just check their tax return,” said Arsal. “If the tax return does not include a Ferrari, we first consult with the taxpayer and clarify that the data is correct.” Authorities won’t just seize the cars in the street, even though they have the right to do so, he said.

Tax officials have conducted joint raids with the police targeting car owners who’ve failed to pay levies. As of August 1, about 3.9 million motorcycles and 700,000 cars hadn’t been properly registered, with a tax shortfall of 1.8 trillion rupiah, according to the Jakarta Levy Board.

Enforcing Rules

The nine-month tax amnesty – which ended in March after unearthing 360 billion dollars in previously undisclosed assets held in Indonesia and abroad – was meant to be the first step in a wider reform process aimed at increasing the number of taxpayers and improving compliance.

For Indrawati, it’s time for action. She’s under pressure to boost revenue to enable President Joko Widodo to meet his infrastructure spending goals, while keeping the budget deficit under a legally mandated cap of three percent of GDP. The finance minister said last week the shortfall will probably reach 2.7 percent this year.

“We provided a very clear opportunity, an explanation, that this was an opportunity to start complying,” she said, referring to the tax amnesty. “It provided a fair game for everybody to participate. And I said that after that, we were going to start consistently enforcing the law. We are now going to be enforcing more.” – Bloomberg

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