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Introduction Indonesia Value Added Tax (VAT)
Background Tax is one important element in the structure of a state government budget. Through the tax revenue, the state can continue performing the development to improve the people’s welfare. Taxes is imposed on every taxpayer and collected to finance a wide range of public policy. Paying taxes is a form of taxpayer’s participating in development. As breath for the state budget, the taxation sector is a sector that is always required in raising state revenue. Mishit tax revenue can affect state’s finance. Up to now, tax revenue has been and will be the main source of state revenue in APBN, along with the reduction of foreign loan portion and the decreased revenues from oil and gas. The successful collection of taxes in a country is influenced by several things. The variety of problems can affect the taxpayers in completing their tax liability. In taxation policy, one of successful measurements is seen from the high tax compliance in performing tax obligations in accordance with legitimate regulations. Tax compliance can be measured at least on the level of compliance to register, report income correctly and deposit the tax in accordance with predetermined time. If disobedience of taxpayers is accumulated, it will become a serious problem for state revenue. This happens because Indonesia depends on revenue from tax sector. According to Evans (2015) in the journal entitled “The Internal Costs of VAT Compliance: Evidence from Australia and the United Kingdom and Suggestions for Mitigation”, VAT / GST contributed significantly to total tax revenue, after tax revenue from income tax sector. Considering the importance of VAT / GST as forms of tax revenue in many countries, therefore, the tax authorities (in this case the Directorate General of Taxes) must ensure
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Tax Compliance Indonesia
Tax compliance means the nature of obedient taxpayer in accomplishing tax obligations. In short sense, tax compliance is adherence to tax obligations. Tax compliance can also mean doing what is commanded in the tax laws prevailing in a country. Tax compliance can also mean a taxpayer doing adjustment action toward existing tax regulations. According to Evans in his research, measuring tax compliance with tax to GDP ratio is the easiest and simplest measurement to be used although the reliability calculation of GDP is quite difficult since the average for coverage GDP of each country will be different in the magnitude. However, achievement using these variables among countries can be quite effective and efficient due to considering also the element of cost revenue ratio and employee productivity ratio. According Deviano and Rahayu (2006) in Yeni (2013), tax compliance is a situation where the tax payer met all tax obligations and
performed taxation rights. They define that tax compliance is divided into two kinds, namely: 1. Formal compliance; is a condition where the taxpayers fulfill obligations formally in
accordance with the provision of the Tax Law.
2. Material compliance; is a condition where the taxpayers substantively comply with the provision of the tax material.
The successful collection of taxes in a country is influenced by other things. A variety of things can affect the taxpayers in doing their tax liability. In taxation policy, one of successful
measurements is seen from the high tax compliance of taxpayers in performing their taxpayers’ obligations 4 in accordance with the legitimate regulations of taxation. In a country with self-assessment tax system such as in Indonesia, the compliance in obeying tax voluntarily (voluntary of compliance) was the backbone of the success of the self-assessment system itself (Yeni, 2013). Tax compliance is at least able to be measured from the level of compliance to register, to report income correctly and to deposit the tax in predetermined time. Andreoni, et. al. (1998 in Faa, 2008) stated that the issue of tax compliance had been persisting as far as the existence of the tax itself. This fact explains us that there is a reluctance of taxpayers to meet their tax obligations. Whilst, continuity of a country is determined by state revenues, which one of the sources comes from taxes. Furthermore, it may happen a situation when taxpayers are resistance to pay taxes. When taxpayer do not fulfill their obligations to pay taxes, tax resistance will occur therein. Tax resistance can be distinguished:
1. Passive resistance This resistance is an obstacle that complicates tax collection and closely linked to the economic structure.
2. Active resistance Active resistance is apparent in all efforts and actions that are directly presented to the tax authorities with the aim of avoiding taxes.
4 Protrude aspect is the reduction of expenditures. This will lead to increase profits naturally. The decline in expenditure will make the difference with enlarged income. In fact, to comply with all tax obligations, both individual taxpayers and companies need more effort to do so. The efforts are started from the calculation of the tax, the deposit of the tax even to the accounting treatment. Those efforts take a long time. In addition, according to research in 2009 (in International
Finance Corporation, 2011), the accounting for value added tax and income tax is a tax
calculation which is the most time consuming. This effort is converted into cost unit. Compliance cost that appears to meet the tax obligations of the taxpayer is sometimes too heavy and
cumbersome. On this basis, the taxpayer either individual or entity performs advanced calculations on the management of compliance costs. A concrete example in everyday life is when taxpayers receive services from the tax authorities, in this case in Indonesia, namely the Directorate General of Taxes. If the service takes place in long duration which is time
consuming, then there is actual costs incurred by the taxpayers, it will make taxpayers themselves less comfortable in the waiting time. This time cost is one of the parts of the
compliance cost. The compliance costs consist of: 5 a. Time cost This means the costs incurred for the taxpayers awaiting the completion of their tax liability. b. Direct money cost This means costs directly incurred by taxpayers when the taxpayers resolve their tax liability. c.
Psychological cost This cost is 'cost of mind' and 'cost of stress' for the taxpayers to resolve their tax obligations. Observing at the events related to noncompliance tax, Pricewaterhouse Coopers conducted research regarding the payment of taxes in various countries since 2006. According to research conducted by PricewaterhouseCoopers, tax payment compliance in various countries was affected by following facts:
• Total tax rate This criterion explains about the amount of the total average of all types of tax rates in each country.
• Time to comply This criterion explains how long the tax obligations can be completed.
• Numbers of payments This criterion explains how many types of payments that must be made by the taxpayer in fulfilling all taxation liabilities.
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Value-added Tax Indonesia (VAT)
Taxes are levied by the government in various types in accordance with tax object levied. An objective tax is a kind of tax based on the object with no attention to whom the taxpayers are. Value added tax is one type of objective tax imposed on many countries. It means that value added tax is a tax that is not affected by the taxpayers during the tax objects exist in the form of goods or services subject to tax. Taxable goods or services subject is determined by tax base with a certain scale. These scales then become tax payable for those who become taxpayers. Value-added tax in Indonesia is regulated in the Law of the Republic of Indonesia Number 42 of 2009 on Third Amendment to Law Number 8 of 1983 on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods. According to the Directorate General of Taxes in Constitution in One Script of VAT and PPnBM (2009), Value Added Tax (VAT) is a tax on consumption of goods and services in the area of customs imposed in stages in each production line and
distribution line. In accordance with the characteristics of value added tax based on taxation of the objects with no regard to taxpayers, the same kind characteristics of tax is sales tax, sales tax of luxury goods, value added tax and goods and services taxes. Countries around the world have their own ways in determining the type of value-added tax and also in setting the tariff. Sales tax is a tax levied on the transfer of goods and / or services performed by entrepreneurs in customs area in company or work environment. Indonesia itself had ever applied this tax, but the levy was no longer carried out in line with the lifting of Sales Tax Regulations in 1987. The sales tax which is still in force in Indonesia is Sales Tax on Luxury Goods (PPnBM). PPnBM is a tax levied on luxury goods undertaken by manufacturers to produce or import the goods in their business or work activities. This tax is still applied on the basis of:
• The balance of taxation between low and high-income consumers.
• The control of consumption patterns of taxable goods categorized luxury. • The protection on small consumers.
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Goods not subject to VAT
Daily necessities basic to the public need Food and beverages served in hotels, restaurants, cafés, including both food and beverages consumed on and off the premises, and food and beverages delivered by a catering business Money, gold and securities Products of mining or drilling taken directly from source
The following services are not subject to VAT:
• Arts and entertainment • Educational
• Financial • Hotel • Insurance
• Intra-government • Labour
• Mail services requiring a stamp • Medical health
• Non-commercial broadcasting • Parking
• Public transport (land, water, and air) • Religious
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VAT refunds for tourists
A VAT rebate for luxury goods bought in Indonesia is available for tourists at international airports on the day of departure. Eligibility is restricted to tourists who have stayed in Indonesia for no longer than two months. Foreign residents are excluded. As this is a relatively recent programme, most participating retailers are limited to shopping malls in Jakarta and Bali.
Conditions:
Goods must be bought at shops which display a "VAT Refund for Tourists" logo . Tourists must ask for a VAT rebate (a tax invoice) which is called a faktur pajak . Goods eligible for discount must total at least Rp500,000 and be listed on one tax invoice. Multiple invoices can be claimed, but each must have a minimum total of Rp500,000
Excluded goods: food, beverages, tobacco, guns, and goods prohibited on an aircraft
Goods must be purchased within one month of the day of departure from Indonesia
Goods must be carried as accompanied baggage
Claims procedure:
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The Impact of Value Added Tax to Economic Indonesia
1.1 The Treatment of Capital (Value Added Tax)
Three variations of VAT also arise through different treatments of capital goods. The variations described here are in terms of the subtraction method of cornputing the VAT base. A gross product type VAT does not allow purchases of capital goods to be subtracted from a firm’s sales to determine its tax base. Any part of the VAT assessed to the capital producer’s value added which he is able to pass on as a higher price is not recoverable by the purchaser through a tax base reduction matching the purchase price of the capital. An income type VAT reduces the firm’s tax base in each period by the amount of its capital depreciation in that period or by some proportion of the capital purchase price. This type is analogous to net national product, a
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1.2 Rate Variations and Exemptions (Value Added Tax)
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1.3 Issues Concerning the Effects (Value Added Tax)
OF A VAT The consequences of adoption of a VAT, or any tax change, for inflation, income distribution, resource allocation, economic growth, and a nation’s balance of payments depend on the specific form of the tax and the accompanying circumnstances. This section of the paper describes possible effects of a VAT, noting some of the specific aspects of the tax and some of the conditions in the economy which must be considered in order to reach valid conclusions about whether those effects will or will not follow the imposition of the tax. The general categories of considerations discussed are relevant for analysis of the effects of any tax change, not merely one involving a VAT. One inevitable change in circumstances accompanying any tax change and bearing on subsequent economic developments is the possible use of new revenues. New tax revenues may be used by the government:
(1) to purchase goods and services; (2) to reduce or replace another tax; (3) to retire outstanding debt;
(4) to hold balances in commercial or central banks. Monetary conditions also influence the effects sometimes associated with tax policy
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1.4 Inflation
The possibility of increases in the average price of goods and services upon enactment of a VAT has been a concern of Europeans, even though for some countries the VAT replaced a similar tax known as a turnover tax. For example, in the past year France reduced its VAT rates, along with other measures, reportedly for the purpose of combatting inflation. Imposition of a VAT or a change in any tax rate, by itself, cannot be considered inflationary or deflationary. Even if sellers were able to raise prices to cover the tax they pay, this would constitute a onetime increase in their prices, but would not necessarily lead to inflation, which is a continuous increase in the average of prices over time. Even associating a one-time increase in the level of prices with a tax change would be accurate only under special circumstances. A tax on a single good could often be expected to raise the price of that good and perhaps affect prices of related goods and
services.5 However, a rise in the general price level cannot be mnaintained unless there is a rise in the dollar amount of goods and services demanded relative to output. Assuming no decline in output, this would require either expansion in the money stock or decline in the public’s holdings of real money balances.° If there were neither a rise in the money stock nor an increase in the rate of money turnover, buyers would be unable to make all of their previous purchases at higher prices. A result of a widespread attempt to raise prices would be reduction in the real amount of goods and services sold, rollbacks in some prices, and/or adjustments in production and
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1.4 Income Distribution from Value Added Tax
Many believe a VAT to be a regressive tax — one which takes a larger proportion of lower incomes than high ones. An appropriate analysis of the effects of a tax on income distribution requires consideration of the specific form of the tax — including its rates and exemptions — and the use of the revenues, Consideration of how these in turn affect income distribution is rather complex. To illustrate, Great Britain replaced selective employment and special purchase taxes with a VAT, effective April 1, 1973. This VAT has a basic rate of 10 percent and a zero rate on some items, including food, housing, fuel, power, and passenger transport. Under the special purchase taxes which were replaced, some luxury items were taxed at a rate of 25 percent while many items purchased more universally were taxed at rates lower than 10 percent. The effect of this tax substitution on income distribution is contingent on how prices of commodities respond to the elimination of one tax and the imposition of the other. The substitution would usually be considered regressive if prices of items purchased predominately by lower income households rise relative to prices of purchases made by higher income households. The assumption, often made, that prices respond in direct proportion to the tax change is usually unwarranted.7 The income distribution effect of adoption of a consumption type VAT in the U.S. would depend on a number of circumstances including, of course, its rates and exemptions. The use of revenues — for example, whether they were used to reduce or eliminate corporate income taxes, social security taxes, or property taxes, or whether they were used to increase government spending — would help determine the distribution of real income after the tax change. In
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1.5 Economic Growth From Value Added Tax
One objective apparent in discussions concerning taxation is that the tax system encourage or at least not impair the economy’s potential for and achievement of economic growth. What, then, are some of the possible consequences of a VAT on growth? Once again it depends to some extent on the policy actions accompanying the VAT and responses to these actions. In general we need to ask whether the private sector responds to a given tax substitution or increase by: (1) reducing consumption;
(2) reducing investment;
(3) increasing the supply of productive resources to the market. Response (4) appears conducive to growth. However, for the growth impact of response
(5) to be lasting, there must be balance between demand and the resulting increase in the supplies of goods. Slack in demand resulting in accumulations of unsold goods is a signal for a production cutback (and/or a price decline) in a market economy.
In general, policies conducive to growth are those which increase supplies of productive resources and investment and those which foster conditions in which an essential balance between aggregate supplies and demands can he maintained. The combination of responses (1), (2), and (3) to adoption of a VAT is influenced by how the VAT, the accompanying use of funds, and monetary conditions affect prices of current versus future consumption8 and the conditions which lead resource owners to hold or release their resources to the market. If monetary
conditions (rates of money stock growth and money turnover) do not change, relative prices will reflect the impact on prices of the tax for which the VAT was substituted or the spending
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1.6 Balance of Payments From Value Added Tax
A VAT, as opposed to some other taxes, is considered advantageous to an individual country’s balance of trade. Provisions of the General Agreement on Tariffs and Trade (GATT) foster this effect. GATT permits a rebate of indirect taxes, such as a VAT or sales tax, on exports so that the destination price of the export svill exclude the tax, but does not permit the effect of direct taxes, such as the corporate income tax, to be excluded from the export price. In addition, GATT allows a border tax on imports equivalent to the importing country’s indirect tax. If direct taxes have a positive effect on the prices of commodities, which is reversed with elimination of the tax, the substitution of an indirect tax, such as a VAT, for a direct tax would tend to increase a
nation’s exports and reduce its imports, given that other factors affecting trade remain
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Conclusion
This topic has discussed the concept of a value added tax. Its main purpose, however, has been to illustrate some of the necessary, but often overlooked, ingredients for analysis of any tax
proposal. To analyze the consequences of any tax change, the accompanying monetary
conditions and the change in the amount of one or more of the possible uses of the revenues must be considered. Two basic points made in this topic are:
(1) the consequences for income distribution, economic growth, and the international balance of payments of a VAT substitution in the tax structure depend largely on what happens to prices (2) the effects on prices of the imposition of a VAT in place of another tax depend to a considerable extent on monetary conditions the rate of growth of the money supply and the velocity of money and on the price-impact of an alternative tax or other use of funds.
