Enhancing Tax Ratio, Strategies and Challenges

Oleh: Rima Budiarti, the Directorate General of Taxes officer

When discussing taxation, it always involves considering the tax ratio, which continues to pose a significant challenge for country. The tax ratio, also known as the tax-to-GDP ratio, measures a country's total tax revenue relative to its gross domestic product (GDP). It is expressed as a percentage and provides insight into a country's tax burden and fiscal capacity. A higher tax ratio indicates that a more significant portion of a country's economic output is collected in taxes. A lower tax ratio suggests a smaller tax burden relative to GDP. This ratio is an essential indicator for policymakers and economists to assess the efficiency and effectiveness of a country's tax system. It can also provide insights into the government's ability to finance public services and infrastructure.

The Main Challenge

The main challenge faced by Indonesia in increasing its current tax ratio is to enhance voluntary tax compliance. Increasing voluntary tax compliance requires the effective implementation of various strategies to incentivize taxpayers to accurately and promptly fulfill their tax obligations. Here are some domestic strategies to enhance tax compliance:

1. Tax Services and Tax Education

Increasing voluntary tax compliance through improving tax services involves making the tax process more accessible, efficient, and user-friendly for taxpayers. The Directorate General of Taxes (DGT) now emphasizes digital services, such as e-filing and e-billing, to help taxpayers easily fulfill their obligations. Meanwhile, the DGT increases tax compliance through tax education by raising tax awareness among all individuals, including future taxpayers, from early childhood to college students. The DGT has implemented programs such as the Tax Inclusion Program, Tax Volunteer Program (Renjani), Business Development Program (BDS), and other comprehensive tax education initiatives. Besides, DGT also enhances cooperation with institutions, agencies, associations, and tax intermediaries.

2. Tax Supervision

DGT uses data and technology to assess taxpayer risk profiles through Compliance Risk Management (CRM). CRM involves identifying, mapping, modeling, and mitigating taxpayer compliance risks to create a systematic, measurable, and objective framework. By analyzing taxpayer behavior and resource capacity, CRM offers treatment options to enhance compliance and prevent non-compliance effectively.

3. Tax Law Enforcement

Tax law enforcement in Indonesia is overseen by the Directorate General of Taxes. The DGT focuses on increasing tax compliance through strict and firm implementation of tax laws. However, enforcement actions are considered a last resort, and the emphasis is placed on prioritizing persuasive methods to address violations in line with the DGT's primary objective, which is to collect state revenues.

The Role of Technology

Digital technology, particularly digitization and big data, can greatly improve tax collection efficiency and increase the tax ratio by streamlining processes, enhancing compliance, and better detecting tax evasion. Digitalizing tax administration systems and utilizing big data can reduce the cost of administration and collection, thereby improving tax collection efficiency.

One of the DGT's strategic plan programs is to digitize tax services, including the development of digital services (currently 105 digital services) and revitalizing the role of the contact center in tax services by deploying AI-powered chatbots to provide instant assistance. This can enhance customer service and improve compliance. Additionally, there is a mobile application called M-Pajak for taxpayers, which can be downloaded from the App Store and Play Store. DGT also provides online Filing and Payment Systems such as E-Filing, E-Billing, E-Bupot, and others. Moreover, the use of technology and big data in all tax functions, from education to law enforcement, employs CRM to determine taxpayers' risk profiles.

In enhanced data collection and integration, DGT integrates data from various sources or institutions, such as integrating taxpayer individual numbers (NPWP) and national identity numbers (NIK) to implement a Single Identity Number (SIN) system where one identity number can be used for various administrative purposes, including taxation. This SIN system is expected to increase the efficiency and effectiveness of tax administration by integrating taxpayer data into one centralized system. In this way, the government can monitor and supervise people's tax obligations more easily and accurately. This data integration also reduces the possibility of errors or duplication of data that often occur in disparate administrative systems. Furthermore, DGT also uses data from third parties, such as banks and online platforms, to help cross-check information provided by taxpayers.

Tax Law Enforcement

Tax law enforcement in Indonesia is overseen by the Directorate General of Taxes, which focuses on increasing tax compliance through strict and firm implementation of tax laws. Enforcement actions are considered a last resort, and the emphasis is placed on prioritizing persuasive methods to address violations in line with the DGT's primary objective, which is to collect state revenues. To minimize the need for tax law enforcement, the Directorate General of Taxes (DGT) has implemented several strategies:

1. Firstly, they aim to educate taxpayers to pay their taxes before the due date, optimizing the role of tax educators to encourage voluntary compliance.
2. Secondly, they seek to enhance the role of the contact center by making outbound calls to remind taxpayers to settle their taxes before the due date.

Strategic Steps

The key strategic steps for improving the tax ratio are as follows:

1. Enhancing better taxpayer services by developing digital-based services with a focus on simplification, transparency, and legal certainty to make it easier for taxpayers to fulfill their tax obligations.
2. Building institutional capacity by providing ongoing training and professional development for tax officials to enhance their skills, competencies, and knowledge and also improving internal controls and oversight mechanisms to prevent corruption and ensure integrity within the tax administration.
3. Increasing public awareness and trust by running extensive public awareness campaigns to educate taxpayers about the importance of tax compliance from an early age, utilizing various media channels to promote a culture of voluntary compliance among a broad audience.

In the end, prioritizing the implementation of these key steps can help tax authorities effectively increase voluntary tax compliance, enhance tax collection revenue, and result in an increased tax ratio.

*) This article represents the author's personal views and does not represent the stance of the institution. 

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