Indonesia’s Tax Ratio is Underperforming!

Indonesia’s tax system that has been underperforming for many years as it does not collect as much as it should. Indonesia consistently ranks near the bottom in regional and global comparisons of the so-called tax ratio, or tax revenues as a percentage of gross domestic product (GDP). Currently, this is about 10%.

The number of staff working in the tax administration is too few. Then, the operating budget is too low. The Organisation of Economic Co-operation and Development (OECD) Tax Administration 2023 report shows the number of staff working in a tax administration and the amount of revenue that it collects has a relationship, the higher the number of staff, the higher the revenue. 

In countries with a tax ratio lower than 14%, one tax officer is employed for every 2,000 taxpayers. In countries with a tax ratio between 15% and 20%, there is one taxman for every 1,500 taxpayers. And if a country has one tax officer for every 680 taxpayers, then, statistically speaking, that country is in the big league: its tax ratio is more than 20%. The trend is clear: the more tax officers there are, the higher the revenue collection.

Source: https://ringgitplus.com

For a country with a labour force of “only” 13.8 million, Australia employs around 18,000 tax officers. Indonesia, a country 10 times the size of Australia in terms of the labour force, employs “only” 45,000 tax officers or just 2.5 times Australia’s figure. This analysis suggests that there is a need to significantly increase the number of tax officers.

The number of employees working in the tax administration is but a representation of the bigger picture: the amount of money spent on the tax administration system itself. In other words, the budget allocated to the tax agency. The data is quite clear: the more money spent on the tax administration, the higher the level of tax revenue. For countries in the big league, or those with tax ratios more than 20%, they spent, on average, the equivalent of 0.2% of their GDP for their tax agencies’ operating expenditures. Indonesia allocates only the equivalent of 0.04% of its GDP to the tax administration. 

Malaysia too has one of the lowest tax to GDP ratio of 11.8%. The Federal Government has projected its revenue collection in 2024 to grow 1.5% to RM307.6 billion. So, we need to have two strategies:

(i) broaden the tax base, with Tobin tax, remittance tax, inheritance tax or “excess” profit tax for new sectors; and

(ii) improve collection with more enforcement officers.

Reference:

Investment in people, tech to increase tax revenue, Glenn Polii, The Star, 16 March 2024