Indonesia has the world’s fourth-largest population at almost 260 million, but only 10 percent are registered as taxpayers and only about one million actually submit a tax return. That’s a major reason for the country’s huge and growing deficit, which has stalled the present administration’s ambitious infrastructure plans.

To jump-start the recovery of assets that wealthy Indonesians sequester abroad, the country launched a tax amnesty program in the summer of 2016. It was an experiment that drew criticism from the likes of OECD, the IMF, and domestic labor unions. Still, as it enters the final days of its nine months, the program has exceeded monetary expectations, netting about $330 billion of tax revenue.

The big question, once it wraps up on March 31, is what to do with that money. Finance Minister Sri Mulyani has created a task force to address the repatriated assets, but they can only really start their work after the final numbers are released. The government must also respond to criticism that the amnesty program lets off tax evaders too easily, to the detriment of the working class.

Closing the deficit

“The revenue from this will significantly contribute to reducing the national deficit,” said Asmiati Malik, an economics researcher at the University of Birmingham. “It could do so by as much as 70 percent: from $23 billion to $8.2 billion.”

In recent weeks, regional tax offices have put on daily public campaigns to encourage participation in the amnesty program. Hestu Yoga Saksama of the Taxation Directorate General told the Jakarta Post as many as 4,000 people signed up for it every day in March that as many as 4,000 people signed up for it every day in March, suggesting it arose from a general tendency to procrastinate on personal finances.

“In our culture, people tend to wait until the very last moment,” said Yoga.

Over three million Indonesians have become new tax payers in the last year, according to the Directorate General of Taxation. This includes high profile business people like those of the Indonesian Chambers of Commerce and Industry, a business lobby, who signed up en masse earlier this year.

Since the 1990s, when there were ethnic riots and political unrest before and after the fall of long-time dictator Suharto, rich Indonesians have relocated money to tax havens like Singapore, according to Bloomberg.

“Two huge benefits of the amnesty program for taxpayers now are the low interest rate and the abolition of tax debt,” said Yustinus Prastowo of the Center for Indonesia Taxation Analysis.

If they repatriate assets, individuals will be charged between two and ten percent interest, rather than typical corporate or personal income tax rates, which can reach 30 percent. And they must commit to keeping those assets within Indonesia for at least three years.

Expanding the tax base

Indonesia has already generated more revenue from its tax amnesty experiment than analogous efforts in countries like India and Germany, but according to some experts, there remains room for expansion.

“The major issue is that the number of taxpayers who joined the amnesty program is still low, proportionally,” said Malik. “There are roughly 700,000 people who joined the program out of a total 32 million taxpayers… which is only 2.2 percent of those eligible.”

Malik called for a more progressive tax policy to increase participation in both the amnesty program and taxation in general. “It should be more progressive regarding extensification [widening the tax base], and increase the incentive for tax compliance and avoidance,” she said. “These solutions hinge on using ‘one-gate identification’ that integrates a person’s bank account, national ID, and tax ID, so that no one can avoid declaring their assets.”

That being said, the first round of the amnesty program is well-timed; by September of this year, Indonesia will join the Organization for Economic Cooperation and Development’s Automatic Exchange of Information initiative to share its tax figures internationally. That means it will be able to access the details of Indonesian citizens’ offshore assets in countries like Singapore and the Cayman Islands.

Rising inequality

The OECD, however, was an early critic of Indonesia’s project of tax amnesty. Programs like this are “unlikely to deliver benefits that exceed their true costs, but carry a risk of leading to an erosion of the gross revenue collected and may negatively affect overall tax compliance,” Philip Kerfs, of OECD’s Centre for Tax Policy and Administration, told Bloomberg in August 2016.

Opponents of the program argue that tax evaders are essentially rewarded for flouting the law.

Last fall, there were large worker protests in Jakarta against tax amnesty, and most of the country’s labor unions have vocally opposed the policy.

The International Monetary Fund also expressed doubts about the program. “We were a little skeptical with the implementation of tax amnesty anywhere, but we hope we are wrong in Indonesia,” said IMF’s Luis Bereu.

On Monday, the Directorate General of Taxation announced it was devoting “special attention” to pursuing several members of a Forbes list of the richest Indonesians who have not yet registered for tax amnesty.

Prastowo suggested another reason why the funds may eventually fall short of their potential — the hardline rallies that gripped Jakarta last November and December, against the city’s Chinese Christian governor. The political disturbance, he said, may have deterred investors from bringing their money back home. It’s a remarkable parallel to the unrest that sent many wealthy Indonesians packing in the first place.
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