key: cord-0065410-eestiq4t
authors: Utami, Denita; Ilyas, Wirawan B.
title: The role of tax in COVID‐19 response in Indonesia: The principles of flexibility, solidarity, and transparency
date: 2021-03-25
journal: nan
DOI: 10.1111/aspp.12573
sha: 43f585c806323cf912b9184ee45112bf55c4f1d3
doc_id: 65410
cord_uid: eestiq4t

As of October 16, Indonesia currently has the highest fatalities of COVID‐19 in Southeast Asia. Indonesia’s gross domestic product (GDP) is now expected to shrink by 1.5 percent this year. This is largely due to reduced consumption and investment as the results of containment measures that disrupted the activity and mobility of major industries. As taxes account for a significant portion of government revenue in Indonesia, the role of tax is substantial as the primary source of state budget funding for financing the economic response to COVID‐19. This article argues for flexibility, solidarity, and transparency as the principles of tax in the economic policy response of COVID‐19 in Indonesia. Understanding the extent of flexibility, solidarity, and transparency is crucial to adjust state spending and tax policies, and tax compliance is imperative to ensure a viable source of funding to respond to the pandemic.

As of October 16, Indonesia currently has the highest fatalities of COVID-19 in Southeast Asia. Indonesia's gross domestic product (GDP) is now expected to shrink by 1.5 percent this year. This is largely due to reduced consumption and investment as the results of containment measures that disrupted the activity and mobility of major industries.

As taxes account for a significant portion of government revenue in Indonesia, the role of tax is substantial as the primary source of state budget funding for financing the economic response to COVID-19. This article argues for flexibility, solidarity, and transparency as the principles of tax in the economic policy response of COVID-19 in Indonesia. Understanding the extent of flexibility, solidarity, and transparency is crucial to adjust state spending and tax policies, and tax compliance is imperative to ensure a viable source of funding to respond to the pandemic. economy, particularly on how tax policy can aid governments in responding to the COVID-19 crisis through the principles of flexibility, solidarity, and transparency.

The economic toll of COVID-19 in Indonesia has largely affected the household economy, SMEs, business, and financial sectors. Apart from deaths and disabilities caused by the nature of the disease, aggressive measures to contain the spread of the virus such as physical distancing, stay at home orders, and ban on mass gatherings have significantly impacted the household economy, mainly for those who work in informal sectors such as street vendors and motorbike drivers, who are grappling to make ends meet. SMEs and business sectors face roadblocks through supply chain disruption and purchasing power reduction. In addition, industries such as manufacturing, transportation, tourism, and trade are the worst hit by COVID-19, which subsequently prompt massive layoffs that contribute to the rise of unemployment. Indonesia's gross domestic product (GDP) is now expected to shrink by 1.5% this year rather than the 0.3% contraction the IMF had projected in June, based on the World Economic Outlook by the International Monetary Fund (IMF) released in October 2020 (Akhlas, 2020) .

The economic policies currently implemented mainly center on refocusing activities, funding allocation, and procurement of goods and services to accelerate the COVID-19 response. The government signed a Government Regulation in Lieu of Law (Perppu) that would add more than Rp 405.1 trillion ($24.7 billion) in spending and state budget financing. The regulation also legitimized leeway in state spending and financial relief efforts beyond the legal limit of 3% for the first time in history (Wirayanti & Susanty, 2020) . The budget mainly focuses on healthcare, social safety net, and industry's support as stated on Presidential Instruction (Inpres) No.4/2020. As taxes account for a significant portion of government revenue in Indonesia, while other sources of revenue such as grants or non-tax revenue only serve as the complement (Kementrian Keuangan RI, 2020), the role of tax is significant as the primary source of state budget funding for financing the economic response of COVID-19.

Traditionally, tax functions as the main financing source for public goods such as maintenance of law and order and public infrastructure (OECD, 2014). As COVID-19 continues to burden the health system in Indonesia with a lack of mass testing capabilities and hospital capacity issues among others, the government has to come to terms with less revenue, increasing expenditures, and resulting fiscal constraints. In addition to expanding testing capacity, disease surveillance, and overall health system response, the budget for COVID-19 mitigation efforts needs to be expanded for the research and development of coronavirus vaccines. In this case, government funding is essential as pandemic products are extraordinarily high-risk investments. In this context, it can be argued that tax plays a crucial role to sustain and expand the provision of resources needed during the crisis. As a result, tax policy should exemplify the principles of flexibility, solidarity, and transparency to address the economic impact that disproportionately affected different social groups.

Flexibility as a fundamental principle of tax should be argued in the role of tax in the economic policy response of COVID-19 in Indonesia. Flexibility refers to the notion that tax systems should be flexible and dynamic enough to meet the current revenue needs of governments while adapting to fluctuating needs on an ongoing basis. This means that the structural features of the system should be durable in a changing policy context, yet flexible and dynamic enough to allow governments to respond to the current circumstances (OECD, 2014).

Other than adaptability to different circumstances, flexibility should also consider solidarity. Leon Duguit, a French public law scholar, posited that solidarity is the source of legal obligation. This notion of solidarity can be divided into a sense of social necessity (sentiment de la socialite) and a sense of justice (sentiment de la justice) (Huijbers, 2011) . The sense of social necessity refers to a collective action to accomplish a common or societal interest, while the sense of justice refers to the appropriate distribution of tax burdens (Halliday, 2013) . In this case, the state budget has been revised twice through Presidential Regulation No. 72 of 2020, which amended Presidential Regulation No. 54 of ILYAS And UTAMI 2020, to regulate an increase in state spending and a widening state budget deficit to sustain the effort against the pandemic. The 2020 state budget deficit is now expected to reach Rp 1.03 quadrillion (US$73.4 billion) or 6.34% of gross domestic product (GDP). The principle of flexibility is also reflected in the decrease of the state income, which is projected to reach Rp 1.69 quadrillion, a decrease of Rp 60.9 trillion from the government's earlier projection, with Rp 1.4 quadrillion projected revenue from tax due to lower tax collection.

In addition to the revision in the state budget, the government instigated the principles of flexibility and solidarity in granting tax incentives and deductions for taxpayers who have supported the government's effort to tackle the pandemic through Government Regulation No. 29 of 2020. Taxpayers such as manufacturers of medical devices and equipment for surgical masks, personal protective equipment (PPE) for medical personnel, and diagnostic kits for COVID-19, are eligible for a net income reduction of 30% of the costs incurred to produce those supplies. This incentive is available until September 30 this year and will eventually reduce the amount of income tax the taxpayer would need to pay. This regulation also authorizes tax-deductible donations made to the National Disaster Management Agency (BNPB), any Regional Disaster Management Agency, the Ministry of Health, the Ministry of Social Affairs, or other institutions and organizations appointed by the government. This authorization will allow local production and procurement of medical devices and equipment crucial to support the service delivery in healthcare facilities, and also to support the government's overarching mitigation efforts through collective action. This regulation also ratifies that the pandemic has significantly jeopardized social activity, economy, and livelihood in general. Therefore, it is imperative to stipulate comprehensive policies to prioritize public health and protect business owners through collective actions to safeguard the fundamental pillars of the health system and the economy.

Lastly, transparency should also be imperative to tax policy. As the government received international financial support, debt relief, and generated additional funding, they should be able to provide transparent monitoring and reporting of domestic revenues, aid, and spending (Gaspar, 2020) . The government must also demand transparency from pharmaceutical corporations on licensing deals, trial data, and vaccine distribution (Médecins Sans Frontières (Doctors without Borders), 2020). The vaccine development is funded through taxpayer money and therefore requires recognition in developing a system that allows for equitable distribution in the public domain (Yunus et al., 2020) . This is essential to build trust as the public needs to be informed on how funding has been allocated proportionally to the economic and health system recovery. Increased trust and accountability can also improve tax morale and voluntary tax compliance (Verhoeven & Prichard, 2019) . This is important in the long run to strengthen tax capacity-building to mobilize revenues in the repercussion of the crisis (Gaspar, 2020) . In this case, taxes will play a role in shaping the "new normal" through reevaluating current tax policy as the critical building block for increased domestic resources, sustainable development and for promoting self-reliance, good governance, growth, and stability in the time of the pandemic (OECD, 2016).

There are two important lessons to tax policy from the COVID-19 pandemic. The first is to understand the extent of flexibility and solidarity to adjust state spending and tax policies in response to the economic implication of COVID-19. The second lesson is that tax compliance is imperative to ensure a viable source of funding to respond to the COVID-19 pandemic. Taxpayers should comply with tax obligations and the government should increase tax compliance by introducing the forms of moral cost, namely social norms and the public goods nature of tax compliance, as the essence of solidarity. Indonesia has extended the tax return filing to one month and cut the corporate income tax rate from 25% to 22% for 2020 and 2021 tax years, and 20% beginning in the 2022 tax year (Kementrian Keuangan Direktorat Jendral Pajak, 2020a , 2020b . Moving forward, it is important to enforce tax compliance through effective enforcement, facilitation, and trust to invest in rainy day

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THE ROLE OF TAX funds to anticipate the far-reaching economic downturn as the result of the pandemic. This serves as a momentum for society to express their solidarity in fighting the pandemic, and for the government to protect its citizens.ORCID Denita Utami https://orcid.org/0000-0003-1073-9899