The Straits Times says

Wider benefits of Jakarta's tax reform

Efforts to facilitate the repatriation of billions of dollars that Indonesian citizens hold in overseas accounts will certainly aid the national effort to lift the economy. President Joko Widodo, who is increasingly finding his stride as the leader of his vast and sprawling archipelago, is taking on a reform bent that will spread cheer to his citizens as well as Asean neighbours. All will benefit if the region's No. 1 economy makes swifter progress than the 4.8 per cent recorded last year. That's one of the reasons why Singapore supports Jakarta's tax amnesty, which is meant to broaden the tax base and curb the large budget deficit.

The tax programme, which began in July, seeks to bring back trillions of rupiah supposedly held overseas. Its finance ministry says Singapore accounts for 85 per cent of this, with the rest mostly in Australia, the United States and Switzerland. While the estimates are debatable, as it's never easy to keep track of private funds over long periods, the amnesty's success is more measurable: About 552.7 trillion rupiah (S$57.5 billion) of assets have been declared by more than 60,000 taxpayers, according to reports.

More than the tax levied, what will determine the success and failure of an amnesty scheme is how repatriated funds are deployed to boost the economy. The process, however, can stir controversy as shown by a judicial review sought for the amnesty in Indonesia. Tax deals might leave honest taxpayers with a sense of grievance that those who dodge get off too easily while their own compliance is not rewarded. More importantly, an amnesty might draw attention away from the critical factors that led to money outflows in the first place. Capital takes flight for various reasons: tax rates, political stability, proper administration and a steady currency. More than the promise of higher yield, these are real reasons why surplus funds flow to safe havens. Currency depreciation can decimate hard-earned savings, as happened in Indonesia during the Asian financial crisis. That can destroy the confidence of domestic investors. It takes hard work to restore it.

Instead of focusing on good governance, it is not uncommon for certain influential sections in Jakarta to expect other countries to do more or to claim its tax efforts are being thwarted. Singapore has pledged to sign up to the Organisation for Economic Cooperation and Development accord requiring the automatic exchange of tax information between signatory countries, due to come into force in 2018. Encouragingly, Mr Joko plans to undertake tax reforms by raising the threshold for personal taxation and cracking down on tax evasion. Alongside such efforts, taxpayers need to be assured that their tax dollars will be put to good use and not be dissipated by corruption.

A sound tax system anchored to consistent and forward-looking economic policies will bring capital back more effectively than a once- off amnesty.

A version of this article appeared in the print edition of The Straits Times on September 24, 2016, with the headline 'Wider benefits of Jakarta's tax reform'. Print Edition | Subscribe