Indonesia’s Indrawati Aims to Build Trust, Boost Tax Revenue

Tackling Indonesia's Tax Shortfall
  • Wants to raise tax-to-GDP ratio to 13.3% from 11% this year
  • Those who don’t pay their taxes to face ‘serious action’

Finance Minister Sri Mulyani Indrawati is putting trust-building at the top of her agenda as she tries to get more Indonesians to pay their taxes to raise funds for a massive infrastructure plan aimed at stimulating growth in Southeast Asia’s largest economy.

"My job, first, is to restore confidence in the whole fiscal policy and our budget,” Indrawati said in an interview in Jakarta on Friday. “And that’s why clarity about what is the area of the fiscal side, both on the revenue side, spending side, financing side, should be as clear and as credible as possible.”

Indrawati, 53, built a reputation as a technocrat and economic reformer when she was previously the finance minister, from 2005 to 2010. Following an opposition campaign accusing her and then-Vice President Boediono of abusing their authority, she left to join the World Bank as one of three managing directors. 

Her return to the helm of the Finance Ministry last month was lauded by investors as adding impetus to the economic plans of President Joko Widodo, known as Jokowi.

Tax Amnesty

She will help steer a tax amnesty program that the government hopes will boost its coffers by as much as 165 trillion rupiah ($12.5 billion) this year. Indonesia has one of the lowest tax-collection rates in the region: In 2014, just 900,000 Indonesians submitted returns.

“We’re improving ourselves, but if you’re not compliant, I’m going to take it very seriously,” she said, referring to those who don’t pay their taxes. “Serious action, domestically as well as internationally. It’s about time for Indonesia to have this compliance level from all parties.”

For an explainer on Indonesia’s tax amnesty, click here

An Organisation for Economic Cooperation and Development official criticized the amnesty program this week, saying it risks favoring tax cheats and punishing payers. Those who have already declared their assets and paid their taxes will have ended up being treated unfavorably by comparison, said Philip Kerfs, head of international cooperation in the OECD’s Centre for Tax Policy and Administration.

Jokowi aims to boost economic growth to 7 percent during his term, in part by spending billions of dollars on rail, road and port projects. A tax-to-GDP ratio at around 11 percent and sliding commodity prices have put that goal out of reach for now. A draft state budget handed down earlier this week forecasts growth of 5.3 percent next year -- a notch above the 5.2 percent estimate for 2016.

“It’s not acceptable for a country like Indonesia to have a tax ratio which is very low,” Indrawati said. “This is not because we are poor, this is not because we don’t have business people, but it’s because both sides, the taxpayers as well as the government, have not been able to establish a good relationship based on trust, confidence and credibility.”

Among her main challenges will be financing the infrastructure program in the face of a tax shortfall and widening budget deficit. The government is forecasting a fiscal shortfall of 2.5 percent of gross domestic product this year, close to the 3 percent mandated ceiling, prompting Jokowi to call for spending curbs.

Indrawati indicated that the ceiling would remain for now.

"I think it still fits well today," she said.

Weaker Demand

Indonesia has struggled to meet its revenue target on the back of weaker-than-expected global demand for commodities and a slowdown in China, its top export market. China accounted for about 25 percent of Indonesia’s coal exports last year.

Any shortfall that can’t be explained by these factors must be due to the ministry’s inability to collect taxes, Indrawati said. She pledged to address Indonesia’s complicated procedures and high tax rates compared with neighboring countries.

Jokowi said this week that he wants to accelerate development across the Indonesian archipelago -- a string of more than 17,000 islands that would stretch almost from New York to London -- in an effort to lift a vast number of the population of more than 250 million out of poverty.

“In the year of development acceleration, the government is focusing on three breakthrough measures to eradicate poverty, unemployment and social inequality,” he said. “Those three measures are: One, expediting infrastructure development. Second, preparing productive capacity and human resources. Three, deregulation and de-bureaucratization.”

Watch Next: Indonesia’s Indrawati Aims to Boost Tax Revenue

Indonesia’s Indrawati Aims to Boost Tax Revenue
Before it's here, it's on the Bloomberg Terminal. LEARN MORE