Indonesia clamps down on tax evasion to boost revenue

When Mr Anggara Kasih Nugroho Jati, 36, was rapidly expanding his confectionery business, taxes were the last thing on his mind.

Instead, he played "cat and mouse" with the taxman to plough resources back into the business, which was aimed at tourists. Among other things, he sold Lapis Bogor Sangkuriang, a layered cake named after the hilltop town south of Jakarta, and Bolu Susu Malang, a sponge cake made from apples and sweet potatoes from an East Java city.

But now, as Mr Anggara mulls over a possible initial public offering, he is cleaning up the books for his company, PT Agrinesia.

"Now I've been through it all," he told The Straits Times.

"If they want to audit my reported income, then go for it."

After racking up debt to pump-prime South-east Asia's biggest economy during the pandemic, the government of President Joko Widodo is desperate to boost government revenues. But the government is in a bind: Crack down too hard and you risk choking off a fledgling recovery; go too easy and you spook capital markets.

Tax professionals say they have seen an uptick in inquiries from clients seeking help to fend off potential audits.

"There is an increasing number of cases of clients seeking assistance," said Mr Bambang Suprijanto, a Jakarta-based accountant at tax consultancy EY.

A lot is at stake for the government as the gap between spending and revenues widens.

Like many countries, Indonesia's tax take - already low by international standards - shrank last year as a percentage of gross domestic product (GDP). In 2020, revenues dropped to less than 10 per cent from 11.6 per cent a year earlier.

By comparison, the Philippines' tax take in the first six months of this year was shy of 15 per cent despite the pandemic.

Last month, the government in Jakarta said that it would extend a programme to sell bonds to its central bank, which bought them with - effectively - printed money and agreed to pay below market interest rates.

While borrowing will ease next year, Indonesia's budget deficit will still weigh in at 4.8 per cent of GDP by the end of next year - well north of the 3 per cent legal limit.

Analysts were already concerned before the government unveiled its plans.

In July, with Covid-19 infections at a record, debt ratings agency Moody's warned that the pandemic may "challenge government plans to reduce the fiscal deficit to pre-pandemic levels", stopping short of putting Indonesia on a negative watch.

Moody's rates Indonesia's debt one notch above its lowest investment grade with a "stable" outlook.

Even so, a Bill on raising taxes, introducing new ones and tightening loopholes is facing opposition in Parliament. The measures being proposed include a minimum 1 per cent so-called alternative minimum tax on gross earnings even for firms reporting a loss.

The Bill also seeks to hike by two percentage points to 12 per cent the value-added tax (VAT). It would require smaller companies earning at least 1.8 billion rupiah (S$171,000) in revenue to charge the VAT. That is less than half the previous threshold of 4.8 billion rupiah.

The government is also mulling over a carbon tax of 75,000 rupiah a tonne.

Analysts say time is running out for the Bill, with Mr Widodo nearly midway through his second and final term as president.

"Capital markets are going to need to see revenues pick up again," Mr Joseph Incalcaterra, chief Asean economist for HSBC in Hong Kong, told The Straits Times.

"If the tax Bill is not completed now, we may have missed the opportunity before the next election."

That leaves the tax authorities needing to be more thorough with the tax base it has.

In addition to a tax amnesty in 2016, the country is now offering a second partial reprieve, waiving penalties for assets accumulated over the three years to 2019.

The tax authorities say they are better equipped now to deal with tax evasion, armed with data, training and international agreements that make it easier to unearth undeclared income squirrelled away here and abroad.

Ms Cindy Salaki, a partner at Jakarta-based tax consultancy Salaki & Salaki, said the added scrutiny has led to sleepless nights for some clients.

"This is bad news for people with the old way of thinking," Ms Salaki said of the increased scrutiny.

"You could hide things before and not get caught. Now you can't."