Indonesia embraces the next stage of tax digitisation: What can be expected?
Darussalam and Danny Septriadi of DDTC explain how technology may redefine the new tax business process and strengthen certain principles of an ideal Indonesian tax system including certainty, fairness, simplicity and transparency.
Not long ago, many portrayed digitisation as a mere challenge to our tax system, Indonesia is not an exception. Understandably, it has ‘helped’ businesses to generate incomes from a tax jurisdiction without posing a nexus which may make them taxable.
It is also difficult for tax authorities to track goods in a digitised form that are transferred across or between countries. If they are not well-anticipated, unreported business activities or shadow economy will unceasingly increase in the future.
But as technology also may - and should - be applied to the very core of a tax system itself, there might be bigger opportunities to grab.
Apparently, the undergoing tax policy reform in Indonesia has proceeded in parallel with digitisation in tax administration and tax procedures. Evidently, technological advancement is not something that is entirely new in the Indonesia tax system.
Electronic-based tax procedures have been provided, such as E-SPT (tax return), E-Faktur (VAT invoicing), E-Bupot (withholding tax slip), and tax incentives application and reporting.
The next stage of digitisation breakthrough in many more tax business processes is expected. One of the objectives is to improve the information system of the Directorate General of Taxes (DGT), who targets era of automation starting soon.
The government has initiated strategic agenda mentioned as the ‘Renewal of Core Tax System’ (PSIAP). It presents a redesign process of tax administration business process through information system that is commercial-off-the-self (COTS) based. Accordingly, it is an information and technology system that provides integrated support for the tasks execution of the DGT including business process automation, starting from the process of taxpayers’ registration, tax return and other tax documents, tax payment, audit and billing supports and the function taxpayer accounting.
The objective is to create a tax administration that is easy to comply, reliable, integrated with other taxpayers’ data, and able to improve both taxpayer services and monitoring.
The commitment was cemented through the enactment of Presidential Regulation No. 40 of 2018. With such implementation, administration matters related to taxpayers’ compliance should be simpler, effective and efficient.
Based on the timeline, the PSIAP team is currently formulating the scheme for tax business process with more detail, technology system, and the required supporting infrastructure for the core tax system.
Through the PSIAP, it is expected that numerous tax business processes will be redesigned along with improvement of tax data management. For instance, there is already a direction of an integrated database that connects all district data sources into a single network and provides authority to the tax administration to cultivate an information. The goal is to create a tax administration system that is more effective, efficient and has high degree of flexibility.
However, what would it mean to us as taxpayers, since it might appear to some as ‘too good to be true’. Thankfully, there is no need to be overly suspicious regarding what the PSIAP will offer.
Herewith are some useful perspectives on how to perceive digitisation in the tax system, and why it should be welcomed with positivity.
What tax digitisation offers
As the economy itself is unprecedentedly digitised, it is inevitable that the tax system should match the advancement. Moreover, as a highly populated country, Indonesia holds a huge number of potential taxpayers with a variety of economic activities. The challenge will only arise when there is no breakthrough in the tax system.
There are at least six foundational tax principles that the technology carries.
First, digital transformation helps to improve tax certainty. As emphasised by Darussalam (2021), compliance risk management (CRM) is one of the tools that are instrumental for this task. With its help, the DGT aims to treat taxpayers according to their risk profile and behaviour.
Supported with handful data and technology, CRM could enhance the ability of tax authority to detect non-compliance behaviours faster and accurately, monitor economic activities in the informal sector and improve the compliance risk management. These include tracking the location of taxpayers and their assets, maintaining information from reporting and withholding and auditing taxpayers.
Only with this approach, compliant taxpayers can be confident that they will get no suspicious measures from the tax authority. The other way around also applies, where noncompliant taxpayers should expect law enforcement anytime to come.
The good news is that the DGT has provided more detail on CRM with the enactment of the DGT Circular Letter No. 39 of 2021 concerning CRM implementation and business intelligence. Certainly, the PSIAP will provide adequate equipment for CRM to perform effectively.
From certainty, an improvement in the relationship between the DGT and taxpayers is expected. It lays a foundational precondition to enable cooperation and trust, from which voluntary compliance can flourish.
Second, technology will help to develop fairness among the taxpayers. For so long, we have been waiting for a more inclusive tax system, where solidarity in participation is reflected by every segment of taxpayer. As of now, identified by DDTC Fiscal Research (2021), tax contribution from the wealthy individuals is still far from ideal in Indonesia.
It should be noted that, as suggested by Buchanan and McLaughlin (2017), managing high-net-worth individual (HNWI) taxpayers will require accurate mapping of their behaviour. Interestingly, the Smartweb application that has been launched recently as part of the PSIAP has initiated the integration of HNWI information, including the associated individuals and business groups which they directly or indirectly own.
The same direction also applies for every segment of taxpayers. As supported by the OECD (2019), use of digital technologies will help to increase tax compliance in a holistic manner. For instance, by utilising artificial intelligence (AI) and natural language processing (NLP) in data management, accumulated wealth and hidden business activities will have no place to hide.
Hence, the effort to integrate taxpayers’ data from multiple sources - domestically and globally - will help the government in solving shadow economy issues in taxation. From this, Indonesia’s tax base can be broadened to the extent where it is supposed to be.
Third, digitised tax procedures will boost simplicity in numerous tax procedures. Despite certain complexities are inevitable due to good reasons, technology can offer counterbalance to keep the whole business process friendly to taxpayers.
Comprehensive information penetration by the tax authority officials, excellent service, AI implementation, and various features are purported to provide simplicity and efficiency from taxpayers’ perspective.
In this sense, such devices may be utilised to simplify or reduce the number of necessary administrative obligations or forms that need to be filled.
With this in mind, the PSIAP could provide ways for the DGT to accommodate the multipurpose of tax system, where different stakeholders are also demanding different direction of its change. For sure, the COVID-19 pandemic requires the balance of a tax system that is not only able to collect adequate revenues, but also be competitive andredistributive.
Where quick changes of regulations are necessary, technology can help taxpayers to deal with it easily without costing too much time, money, and energy. Also, when it comes to taxpayers’ ambiguity in fulfilling their obligation, technology should play its role to serve them by providing clarity.
In short, the simplification - helped by technology - will ensure predictability, transparency, administrative effectiveness, easy to understand, and reduce the potential or room for manipulation for aggressive tax planning (Tran-Nam, 2016).
More tax revenue with less cost to comply
Fourth, we can expect that costs incurred within a tax system will decrease. This includes the spending from both the taxpayers and the DGT.
From the taxpayers’ side, compliance cost mainly caused by asymmetric information in the tax system (Kristiaji, 2013), the need of tax professionals, high level of tax disputes, and the lengthy time needed to fulfil their tax obligations. With digitised tax business process, transparent and symmetric information ought to be the outcome.
On the opposite, tax administration costs to collect tax revenue by the DGT will also decrease. Digital transformation within the organisation will help human resource allocation to be more effective and reoriented to other sectors that may need more help.
In addition, it will also make the tax officials easier to track and cross-check information on transactions occurred by businesses and household taxpayers with credible electronic evidence.
Ultimately, we can be hopeful that technology will help to prevent the mounting number of tax disputes. Digitisation can help directly by accelerating the resolution process (e.g. through e-court) and indirectly by preventing misunderstanding between tax authority and taxpayers.
Fifth, a fully implemented PSIAP can mark the momentum of revitalising Indonesia’s tax ratio that is sustainable in the long run. The COVID-19 pandemic has become a catalyst for Indonesia's tax reform, particularly in order to ensure the availability of development funds and reduce fiscal risk in the medium term.
Experience from previous economic crises has shown that the pattern of tax revenue recovery generally runs slower than the economy restoration. Therefore, without a significant breakthrough in the tax system, the tax ratio will not increase rapidly in the near future.
Sixth, digitisation will help to hinder corruption. Many decisions can be put into an algorithm, while discretionary judgement can be put into records transparently. Also, with all the processes being computerised, there would be less human involvement in tax administration (Fanea-Ivanovici, et al, 2019). For instance, electronic-based tax invoices will prevent taxpayers from evading VAT by transmitting VAT invoices from taxpayers to tax authorities directly.
It is certain that Indonesia is on a ceaseless journey of digitising the tax administrations to create a new ecosystem that is more transparent, efficient, simple, and equitable. For sure, we can expect that the existence of the PSIAP will enable the DGT to take advantage of developments in artificial intelligence (AI), robotics, blockchain and big data, plus many other advances in technology.
Some mistakes may be inevitable, but we can hold firm on the clear intention to achieve objectives as presented above. With proactive contribution from taxpayers, they can be portrayed as portals to new discoveries we are yet to imagine.
More importantly, the ongoing digitisation will not only be aimed at detecting non-compliance behaviours, but also help taxpayers to comply more easily and improve transparency between taxpayers and the DGT to strengthen the relationship and trust between the two.
Rest assured, the digitised tax system will not only improve tax administration, but also the tax policy making process. High quality data that are well processed will give useful information to the fiscal authority. This information can produce a better estimation of future tax revenue, evaluate existing tax policies, innovate new ways of tax withholding and reporting, and create prospects for new policy opportunities.
The new era of Indonesia taxation might not stop at what has been written here. The PSIAP is presented to not only solve current taxation issues, but also added agility to the Indonesia tax system to face challenges that may arise in the future. It unlocks new possibilities quicker and more effectively in a way that is convenient to the taxpayers.
The most important thing is that we, as taxpayers, take our part as equal partners to the DGT. We might have different views, debates, or even tax disputes. We cannot avoid them. But we are also in the same boat, going to the same destination, that is a more prosperous nation supported by sustainable tax revenue.
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Darussalam is the managing partner of DDTC. He has more than 27 years’ experience in taxation, including as a tax expert witness in the Constitutional Court.
Darussalam is the Head of Indonesia Association of Universities’ Tax Centers. He is the Consultative Board of Tax Accountant Compartment, the Indonesian Institute of Accountant (IAI KAPj). In addition, he has been appointed to be advisor team of tax reform by the Ministry of Finance Decree No. 885/2016.
As a prominent figure in Indonesia taxation, Darussalam has been a source person for major media and high-level discussions with many strategic institutions. He has also authored numerous tax publications at a national and international level.
T:+62 21 2938 2700
Danny Septriadi is the senior partner of DDTC. He has more than 25 years’ experience in taxation.
Danny’s main practice areas are international taxation and transfer pricing (TP). He has advised clients in various areas of corporate taxation, tax risk management and TP. He is also experienced in Arbitration Disputes as an expert in London, United Kingdom and as an expert witness in the Indonesian tax court.
Danny has published several books and articles on TP and international taxation. He was selected as one of the World’s Leading Transfer Pricing Advisers 2015–2019 by Expert Guides. He was also selected as one of the World’s Leading Transfer Pricing Advisers 2020 and World’s Leading Indirect Tax Advisers 2021 by International Tax Review.