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Tax is a common phenomenon as a source of state revenue. For the countries in the world, taxation is an important element, and even the most important in order to support the state revenue budget. The research results showed that almost all countries in the world impose tax on citizen, except for a few countries rich in natural resources as the main source of revenue for states that do not impose tax. For most developing countries, tax is the main source of state revenue. Without tax, the vast majority of state activity is difficult to be implemented. The use of tax covers from personnel expenditure to finance various development projects. Tax is also used for financing in order to provide safety for the whole society. Every citizen from the birth to death take pleasure in the all government facilities that are funded by tax. It is clear that the role of tax revenue for a country to be very dominant in the government support and funding development to achieve independent country. Specifically about that is reflected in the statement of Jeffrey Owens, Director of the Centre for Tax Policy and Administration OECD: "Tax is the pillar of every market economy. Tax provides needed income for the economic investment in the future. Tax makes government has responsible to citizen, and link between government service and citizen participation. In this context, Tax grows as the foundation for the government and become the main element for developing countries to mobilize domestic revenues for development by reducing of dependence on debt".
Research in many developing countries recently has also showed that tax can play a central role in the development and sustainability of the state and society power. It seems the two principles, the imposition of taxes as a negotiation process based on the social contract (revenue-bargaining policy) will promote participatory democracy and institutional development to strengthen the state's capacity to implement its functions optimally sourced income tax. Supporting of the tax implementation, generally every country makes the rules and regulations in imposing and collecting of tax that follow the principles or norm in taxation. For example, fairness aspect, comfort for the taxpayer, proportional amount, efficiency, effectiveness and easiness to collect administratively, and so forth.
Based on the theory, tax is direct and indirect support enforced by the public power to the people or goods to cover state expenditure (Trotle de la Science des Finance, 1906). Tax is imposed dues unilaterally that is payable to the authorities (according to the general norms) without direct benefit and solely used to cover expenses (Dr. Feldmann NJ), then tax is the people's dues to the treasury based on legislation (which can be enforced) by not getting reciprocal services directly demonstrated, and used to pay for general expenses (Dr. Rochmat Soemitro, SH). While General Provisions and Tax Procedures (Indonesia Law) No. 28 of 2007 said that the tax is mandatory contribution by a transfer of resources to the public sector under compulsion that taxable with tax regulation without receipt of a specific benefit of equal value, in order to accomplish some of a nation's economic and social objectives for overall prosperity to the people. According to the theory, we can conclude that (1) tax is withheld with the power of the legislation and its implementation rules, (2) taxpayer can not get the direct benefit, (3) tax is collected by government under compulsion, and finally (4) tax is used to the government expenditures and fund development activities in order to the greatest prosperity. Other theories underlying tax collection are theory of insurance, interest, absolute liability or devotion, purchasing power, and balance. These theories become the guidance of tax collection in many countries including Indonesia.
In Indonesia, the tax has been known since hundreds of years or a thousand years ago. The tax concept at that time was different from the present. In the past, the tax is a transfer of property under compulsion used to strengthen the colonial power, nowadays, since the Indonesia independence in 1945, the tax is a decision based on the principles of democracy in order to comply with people interests. As a country that has the purpose to contrive prosperity, Indonesia has the duty to guarantee the budget to fund all official activities and programs such as education, health, safety and others set out in the State Budget of Revenue and Expenditures. Therefore, tax collection, which has function as state revenue, becomes very important. In addition, tax also has function as regulator in which tax directs or is used as a tool to regulate the allocation of economic resources, stabilization, and income distribution from various community groups so that the national dynamics can proceed as expected. For example: giving tax incentive to attract investment from both domestic and foreign, tax holiday, and tax import to protect domestic production.
In running both the tax functions, there are three important elements that influence. The first element is the tax policy, which is a set of laws that govern how tax is collected and regulated. The second element is an institution as collector, in this case of Directoral General of Tax in charge of implementing the gathering of tax revenues from all sectors. The third element is the taxpayer as a subject and taxable object. If one of those elements is not running, the national tax system will not go well. Therefore, these three elements become the government focus in the tax management.
As the result of the tax activities, this sector becomes a major contributor to the state revenues with rise portion continuesly until more than 70% of the total budget in 2012. Although as absolute the tax is the largest revenue, but when compared with other countries, the income tax in Indonesia is still considered small. This is evidenced when the tax revenue compared to the Gross National Product (GDP), or the tax ratio, its value in 2012 was just almost 16%. With this percentage, based on a World Bank report, Indonesia is still in the low-income countries (per capita income of less than $ 400), as shown in the following table:
Table 1. Percentage of Tax Revenue on GNP in many countries
Tax Ratio to GNP
Low-income Countries (Per capita income of less than $ 400)
Middle to under-income countries
(Income per capita between $ 400 - $ 1.600)
Middle to above-income countries
Sources: World Bank Report
Comparing to 240 and 110 million of population and labor force including about 22.6 million registered companies, Indonesia has a great potential to gain greater tax revenue. Therefore tax system improvement is still conducted continuesly by evaluation and completed policy including follow the social life and state economic development through tax reform program.
Tax reform is basically an improvement towards a better taxation. Reform requires a change to a new paradigm that is considered ideal according to changes in all fields of life including political, economic and social. Tax reform involves two aspects namely policy formulation in the form of regulations and implementation of the policy because tax collection are not separated from its regulation (Rahardjo, 2009:56). The spirit of tax reform is implemented by making fundamental changes in all areas of taxation which at least covers the quality of human resource, tax regulations, taxation and service information system, with the main purpose of increasing voluntary compliance, confidence in the tax administration, and the high productivity of the tax officer. In the United States, the stage of the Tax Reform Act (TRA) will always preceded a survey by the IRS (Internal Revenue Service) to know the public response towards the effectiveness and efficiency of the running tax system. In this phase, the public was given the widest opportunity to criticize the weaknesses of the system, with the intent of these points become the blueprint for the next stage, while in Indonesia the tax reform is an attempt to adjust regulation tax with the trend of economic developments under considering the aspirations of the people.
In Indonesia, Generally, tax reform was implemented in 2 phases. The first phase was began in 1983 until 2000 by issued of the policy to change official assessment system with self-assessment, which is a system that gives trust to the taxpayer to calculate, report and pay their own tax obligations. Implementation of the system is supported by the publication of a set of tax regulations that are more simplicitiy, neutral, equity and legal certaity. In addition, the first stage of reform also include on aspects of reorganization, enhancing of employee numbers and enlargement of the line procedures. In the result, structure of revenue state has shifted in recent decades from oil and gas revenues to the tax revenue. Increasing the function of state revenue from tax sector showed a significant amount in each fiscal year with an average increase of 17.04% as listed in the following table:
Table 2. Tax Revenue of 1983 - 2000
Tax Revenue (in Trilyun)
Source: analysis of research
Although tax revenue attains nearly 26 times the amount since the first reforms released, the weaknesses still happened. Reform activities in 1983, 1994, 1997 and 2000 have proved they did not changed an organizational structure to be slender because of still focusing on the reorganization to enlarge the structure, increase the employees and extend the procedure. Then the change from the official assessment system to self assessment make tax officer lost contact to taxpayers. Although its purpose to cut the way of collusive contact, but the impact on state revenue is very significant where the taxpayer tends to report his business understatement of income or overstatement of deduction. In addition, unreadiness infrastructure and unavailable of good database supported by still corruption culture made the first stage of reform run to be unexpected.
On the second stage of tax reforms. The government attempted to improve the tax administration system with increasing of the employee integrity, infrastructure improvements, remuneration. In this phase, gradually, the Directorate General of Taxation (DGT) as the regulator and tax collector, prepare itself to be the best model of a public institution into a world class institution system. The second phase of reform began in 2001, when the Directorate General of Taxation issued a blueprint of policy for the next 10 years (2001-2010) with the following phases: (1) the establishment of regional offices and Large Tax Office/LTO (2002 ), (2) Modernization regional office, e-payment, e-registration, e-filing (2004), (3) establishment of a task force for the data processing center, e-Taxation, taxpayer intensification and extensification (2005) and (4) Modernization DGT (2006), (5) Modernization of the all regional offices in Indonesia, formulation of middle tax office at each regional office including Batam region and unit of center processing and data management, implementation of performance and modern human resources management (2007), and (6) Establishment of Small Tax Office for all area in Indonesia (2009). This second phase of tax reform had also raised the tax revenue with the average growth of above 14% as the data in the following table:
Table 3. Tax Revenue of 2001 - 2010
Tax Revenue (in Trilyun)
Source: analysis of research
Overall, the process of tax reform in Indonesia includes 4 dimensions of reform in accordance with the theory Caiden (1991), namely:
Reform the organizational structure
The establishment of the organization based on function
Formation of the specification tasks and responsibilities include:
1) Forming of Account Representative (AR) that has specific task to serve and supervise directly the taxpayers in order to comply with their obligations
2) The tax audit is only done by trained auditor with allocation appropriate to the level of audit risk and it is also conducted technical training to supports professionalism of auditor based on the business group of Taxpayers;
3) Specialization of another employee as tax seizor and information technology programmers.
Completing and refining the implementation of Tax Information System (TIS) become the Integrated Tax Administration System (ITAS) controlled by case management system in the monitoring of workflow system refers to the office automation including the services, monitoring payments and audits with the process control, authorization, supervision and reporting designed in accordance with the regulations.
Routine monitoring through the Taxpayers'Account
Providing lines for supervision and investigation.
2. Reform of organizational procedure
Reform at this stage was started by the publication of a set of rules, namely Law No. 6 of 1983 about General Provisions and Tax Procedures, Statute No. 7 of 1983 about Income Tax, and Regulation No. 8 of 1983 about Value Added Tax/VAT to simplify previous rules and provide legal certainty to taxpayers. In the way, this legislation was amended just for certain articles in order to cover loopholes that could impair the state revenue. After that the dimensions this step is implemented through:
One-stop service through Account Representative.
Simplification of administrative procedures and improve the standards of the time, service quality and tax audit. Activities conducted include (i) simplify the form of the report, (ii) accelerate the completion of objection and appeal on the tax products, (iii) strengthening Tax Allowance to accelerate the restitution request, (iv) review the Taxpayer criteria to reduce the restitution request, (v) reviewing the audit on each Notification Letter of Overpayment and accelerates restitution Notification Letter of Overpayment that has low risk, (vi) the concentration of the Value Added Tax (VAT).
Support of modern information technology in providing services, supervision, audit and tax collection, in the form of : i) ITAS is integrated with administrative function and procedure that have been set in the case management and workflow systems supported by e-system, especially the e-Payment, e-SPT , and e-filing that helped speed, accuracy and security of the process of taxpayer administration data recording, ii) automation of the audit process with the help of workflow management in SAPT to avoid duplication of data, recording errors and supervision of audit procedure in accordance with the provisions and also supported by the application of Audit Command Language (ACL), iii) development of a data bank in the concept of a national masterplan and cooperation in data exchange with other institution in order to achieve data transparency; iv) automation of tax collection through the ITAS so that procedures of supervision and administration of tax delinquent can always be done. Implementation of claim conducted by seizor with hard and soft collection method where soft collection can be done with the help of Account Representative; v) implementation of information technology training; vi) using of information technology and other e-system. In order to improve the services, it is developed some applications such as e-Regristation, e-Counseling, Complaint Center, Help Desk, Call Center, Touch Screen supported Knowledge Base contains a Frequently Asked Questions (FAQ), SMS tax, and communication channels and more intensive counseling through various tools such as telephone, email, web portal, recording and storage of documents that is more reliable to use the Integrated Records Management System (IRMS), support for modern office equipments that are complete, where each employee has a personal computer and access information faster in both the internal and taxpayer where each of change in tax provisions that related to taxpayer will soon be consolidated internally, interpreted and then immediately informed to the taxpayer.
3. Reform of the organization's strategy
Reform at this stage begins with changes in the tax collection system from the official assessment to self-assessment. Then the reforms implemented through:
a. Campaign tax awareness and complience
b. Simplification of tax administration
c. Intensification of tax revenue, such as i) implementation of tax audit to the particular industry sector that has still low compliance rate and / or the potential taxation can still be explored, ii) enhance the activity of criminal investigations in the field of taxation to provide a positive deterrent effect; iii) conducting tax collection through foreclosure taxpayer accounts / Insurer Tax, prevention, and hostage-taking;
d. Develop internal mechanisms of quality control on the service and audit process, conduct the training about methods and excellent service techniques, and establish an effective communication system to get feedback.
e. Design, propose and realize the need for investment in connection with the reorganization and the application of modern tax administration system.
f. Reviewing the implementation of the reorganization, performance measurement, taxpayer satisfaction measurement, regular meetings and regular visits to get feedback. Completion Human Resources Management System such as applying the tax administration performance measurement system, performance measurement unit formation, and the formation of an overview of the new compensation scheme in the form of allowances Additional Activities for tax officer.
4. Reform of organizational culture
Some reform activities of organizational culture are:
Program of good governance implementation
Implementing the code of conduct for all employees at the Directorate General of Taxation, forming of Ethic Code Committee, increasing the effectiveness of supervision by the Inspectorate General of the Ministry of Finance, and cooperating with the National Ombudsman Commission;
preparation of qualified and professional human resources (HR) through implementation of the fit and proper test strictly, placing staff appropriate to the capacities and capabilities, reorganization, succession planning, training and development program of self capacity, reward and punishment, moral reform and ethics;
Giving Additional Benefits Activity for tax officer beside other benefits granted
Modern Office Facilities-based on technology with the procurement of facilities and infrastructure that meet the quality requirements and that support the efforts to modernize tax administration throughout Indonesia;
From the description above, it can be concluded that the tax reform provides increased tax revenue significantly, where the value continues to grow from year to year (Tables 2 and 3). In 2011 and 2012, the realization of the tax also increased from 873.9 to 1,016.2 trillion (achieve the point above 1.000 trillion). For 2013, the government is targeting tax revenue accomplish to 1178.9 trillion. With this numbers, it is not surprising that the 72% of the budget currently comes from the tax revenue. Meanwhile, the biggest contributor to the income tax over the last 5 years is private corporate/company taxpayers as listed in the following table:
Table 4. Comparison of Tax Revenue from private company to Personal (in trillions of rupiah)
Tax of companies
Tax of Personal
Source: Ministry of Finance in 2012, processed
The success of the government from tax revenue sector can not be separated from the increasing compliance to pay taxes through the continuous efforts of the tax reform. In point of service and tax audit view, tax reform is already showing positive results. Research from University of Indonesia in late 2007 indicated that the majority of respondents (63.6%) said they were satisfied with the service after the implementation of the tax reform. AC Nielsen (2005), presented that consumer satisfaction index (IQ Index) at the Tax Office (KPP) Large Taxpayers are very high, that is equal to 81, greater than the average level of satisfaction of public service nationally by 75. In addition, tax reform has made a positive contribution to the fight against corruption in Indonesia through a series of intensive supervision and audit. Transparency International Survey (2009) regarding the Corruption Perception Index (CPI), Indonesia scored 2.8 ranks 111 among 180 countries. Indonesia CPI increase significantly compared to the figure of the last 3 years. From 1.9 in 2003 to 2.0 in 2004 and rose to 2.2 in 2005. Teten Masduki from Indonesian Corruption Watch (ICW) said that the main contributors to the rising score of Indonesia is tax reform and the establishment of the Corruption Eradication Commission. The World Group survey also provides information on an increase of Indonesia tax rank from 135 become 123. This is a prove that there are the convenience and comfortable of taxpayers to fulfill their rights and tax obligations. The following testimony on the implementation of tax refom in Indonesia:
Carlos Silvani (IMF)
"â€¦ Improve tax and customs administration. The Government desperately needs to raise revenues to finance its budget. But this should be done in a way that doesn't distort or deter investment decisions. The recent establishment of a large taxpayer office in Jakarta -- with faster processing, more transparency, and less harassment -- is a promising start. Similar reforms should be implemented throughout the tax and customs system as soon as possible. At the same time, more people should be covered by the tax net, for both revenue and equity reasons."
Mark Baird, World Bank Country Director for Indonesia
"Indonesia has a good track record of prudent fiscal management. ...The proposed establishment of a proposed large taxpayer office, if properly implemented done, could signal welcome moves to ensure equity in the sharing of the tax burden."
Asian Development Bank (ADB)
"The Large Tax Office/LTO has been well received by taxpayers, and expanding the concept to other offices as planned will help in restoring the tax administration's reputation."
Boediono (Former Minister of Finance, nowadays. Vice President of Indonesia)
"Bravo Directorate General of Tax (DGT)"