414 Limits of Good Governance in Developing Countries

CHAPTER 12
LESSONS FROM INDONESIAN TAX
ADMINISTRATION REFORM PHASE 1
(2001-2008): DOES GOOD GOVERNANCE MATTER?

Yond RIZAL

INTRODUCTION

The Government of Indonesia has been reforming tax administration

since 2001. This current reform has infused good governance elements to
increase taxpayer compliance, to enlarge public trust in tax administration,
and to improve the productivity of tax officer. This paper exposed that the
reform was successful in generating tax revenue but not so successful in
increasing taxpayer compliance. Also, it takes a great deal of time to have
the best results of the implementation of good governance elements, parti-
cularly in a country which had been disregarding good governance practices
for long time.
In undertaking tax reforms, any government needs to take into account
the concomitant tax administration reform, since weak tax administration
will become obstacle for achieving the objectives of tax reform. The tax
administration needs to achieve the highest possible degree of taxpayer
compliance, and to administer the tax laws efficiently, effectively and fairly,
with the highest degree of integrity of its human resources. Then, the high
public respect to the tax authority will come.
Since 2001, the Government of Indonesia has been implementing the
Modernization of Tax Administration Program as part of the current fourth
major tax reform. The current reform incorporated good governance ele-
ments and initiatives to create a more effective and efficient administration
by making procedures more transparent, ensuring that the systems more
accountable, and improving officer integrity. The reform aims to have more
public trust in the DGT, more productive officer, and better tax compliance.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 415

In general, the Modernization focuses on organization, business process, and

human resources management.
This paper tries to take lessons from the current Indonesian Tax
Administration Reform from the point of view of governance and portrays
the governance process for the last ten years in Indonesian tax authority. The
paper also aims to arouse the interest and hopefully help in provoking debate
among academe, government officer, business people, and non-governmen-
tal organization‘s activists in seeing what really happened in the process of
reforming tax administration in Indonesia.
As the DGT believes in reforming institutions and thereby changing
incentives and implementing good governance practices, hence transparency,
accountability and other elements of good governance have been increasing
in the past ten years. Regardless some corruption cases, the DGT is truly a
very different place than it was ten years ago. However, it still takes time to
claim the success. The author believes that recent changes in the tax admi-
nistration require more commitment on good governance from each stake-
holder for the better future of Indonesian taxation.

1. WHY TAX ADMINISTRATION REFORM?

The 1997 Asian crisis placed Indonesia into deep economic recession.
Indonesia experienced serious crisis as the exchange rate plunged deeper, the
banking system was damaged, and the GDP dropped. This was surprising,
since few years earlier, the World Bank praised Indonesia as one of the East
Asian Miracles.1 Indonesia, at that time, had experienced 7% annual growth
for three decades under the Soeharto administration in the so-called New
Order Government. The enjoyment of high economic growth, however,
ended, as the 1997 crisis deepened. Corruption and poor governance was one
of the causes of the growing crisis, as summed up by Hill (1999: 47-83).
Continuing corruption, collusion, and népotisme (Korupsi, Kolusi and
Nepotisme or KKN in popular Indonesian terminology) that prevailed during
the crisis worsened it. These factors, in conjunction with other factors such
as the unstable international financial and capital market, macroeconomic

———————
1
Krugman argues that it was not a miracle but a myth. He predicted that the growth would
slow down following `the law of diminishing return.` (See more on Krugman‘s ―The Myth
of Asia's Miracle.‖ Foreign Affairs, November/December 1994).
416 Limits of Good Governance in Developing Countries

policy weakness, domestic financial sector weaknesses, and IMF‘s failed

recipe at the early stage of the crisis, worsened Indonesian economic crisis.
The crisis certainly has bad impact on tax revenue, as the purchasing
parity power of the society had decreased and some corporate taxpayers had
liquidity or even solvency problem since the real value of their debt was in
foreign currency denomination. This had created pressure to have more
efficient tax administration in collecting tax revenue. The Government of
Indonesia (GOI) has been promoting, as consequence, the tax administration
operation is to carry out more transparently and fairer. In response, the DGT
has launched the modernization program with three main objectives: to have
high taxpayer compliance, high public trust in the Directorate General of
Taxation (DGT), and high productivity of tax officers
In generating the capacities to implement tax administration reform
towards good governance practices, the DGT has enjoyed an explicit and
sustainable political commitment from the GOI regardless the change of the
regime. A Tax Modernization Team with capable human resource, although
not in a full time basis, runs the gradual comprehensive administration
reform with a well-defined and appropriate strategies and programs.
According to the World Bank, Indonesia has a sound tax structure
(2003b: ii). The World Bank also reported that Indonesia has a good tax
system but a low tax ratio. The bank further assumed that the Indonesian low
tax ratio might be partly due to Indonesia's reliance on oil and gas revenues.
Given that the present structure of the tax system in Indonesia is funda-
mentally sound, after a major reform in the mid-1980s, therefore, the World
Bank argued that future revenue growth would come mainly from improving
a weak tax administration. It would also come from developing new and
more efficient sources of revenue, including non-tax revenue, and better
managing of the government's dependence on natural resource revenues.
Indonesia had a tax to GDP ratio2 as much as 11.00% in 2001. This
figure was much lower in comparison with neighboring countries such as
Malaysia (20.17%), Singapore (22.44%), and Thailand (17.28%) in the same
fiscal year (see Table 12.1). This low Indonesian tax ratio indicates the
inefficiency of tax system and tax administration. It also indicates that there
are some potential in the Indonesian tax system to be enhanced.
———————
2
The tax to GDP ratio or tax ratio is simply defined as the ratio of taxes (revenues) to
output. Judging tax ratio of a country and comparing to other‘s may mislead the conclusion
since every country has their own characteristics such as political and economic structure,
tax structure, income per capita, and public service capacity in general. However, a low tax
ratio indicates an ineffective and inefficient administration.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 417

Table 12.1. Tax Ratios of Selected Countries, 2001

Country GDP (million USD$) Tax Ratio %

Singapore 84,900 22.44
Malaysia 88,000 20.17
Thailand 115,300 17.28
Philippines 71,400 13.69
Indonesia 168,428 11.00
Japan 4,100,000 13.50
USA 10,100,000 16.60
Myanmar 465,716 2.81
Pakistan 56,130 12.40
India 379,205 9.87
Mexico 467,345 12.00
Kuwait 3,708 3.00

Source: Tax Policy Team, MOF, 2003 and State Budget 2010.

Tax reforms have been conducted in Indonesia since 1980s. The first
modern tax reform was crucially started in 1983 when Law No. 6/1983 on
General Provision and Tax Procedures, Law No. 7/1983 on Income Tax, and
Law No. 8/1983 on VAT and Sales Tax on Luxury Goods were launched. In
this reform, Indonesia moved from official assessment to self-assessment
system. It was a very important momentum for developing the taxation
system in Indonesia, not only from a tax policy perspective but also from the
standpoint of administration. This reform was aimed at improving tax
collection and to change the colonial inheritance ordinances, to have more
people‘s participation, to have good distribution of income, and to promote a
self-reliant state budget. Many types of taxes inherited from the Dutch
Colonial Government were simplified into four types: Income Tax, VAT and
Sales Tax On Luxurious Goods, Land and Building Tax, and Stamp Duty.
Following the reform, Indonesia experienced a sustained boom in tax
revenue (Gillis, 1989: 105).3

———————
3
For a more comprehensive explanation on the reform during the 1980s, see Chapter 4 of
Gillis (1989).
418 Limits of Good Governance in Developing Countries

However, increasing tax revenue did not mean there were no

obstacles. Tax noncompliance and corruption still hinder the effectiveness
and efficiency of tax collection. Most Indonesians do not comply with their
tax obligation, while tax corruption is pervasive and can seriously hurt the
development. If the GOI expects to continue developing the economy, taxes
are the only avenue for raising the needed revenues and the GOI has to deal
seriously with those two problems; otherwise, the previous reforms will end
up being no more than just examples of Indonesia‘s inability to overcome
the inefficiency and malfeasance that have tainted so many tax collection
efforts for decades (Prawiro, 1998).
According to Asher (1998: 138), tax compliance has always been a
core issue in Indonesian tax reform. However, in practical sense, the main
drive for reform has always been to increase the amount of tax revenue. At
the initial stage of the 1980s‘tax reform, the main concern of the GOI was
the inefficiency of tax system, but then the concern shifted to how to
increase tax revenue (Gillis, 1989: 91). It seems that the 1980s‘ tax reform
was an anticipated response to the mid-1980s‘ economic crisis (Wardhana in
Subiyantoro (ed.), 2004: 17) or as precautionary action for no longer reliable
oil revenue (Prawiro, 1998: 238-239). 4 The 1980s' tax reform eliminated
specific tax incentives, but the 1994‘s tax reform reintroduced them to
encourage investment in the high priority economic sector. The 2000‘s tax
reform was later introduced, in response to the economic crisis. Thus, the
rationale of the previous reforms was more of a response to the crisis than
the recognition of the capacity building process that emphasizes good
governance practices and focus upon compliance. Although, the rationale for
current reform is not so different in terms of generating tax revenue, the
changes in political and social situation put more pressures on the GOI to
change the tax system and administration.
Although previous reforms had always considered institutions and
policies as the principal determinants of tax reform success, those reforms
did not have good governance elements. Success in the policy and legal
reform in the past, as part of tax institution and system, has not eliminated
corruption within the DGT, nor has it changed the public‘s trust in the DGT.
The Soeharto regime (1966-1998) focused on economic growth and
disregarded the best practices in governance. Over three decades, the socio-
economy and political development was based on a discretionary, corrup-
———————
4
Both Wardhana and Prawiro were former Ministers of Finance under Soeharto Admi-
nistration.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 419

tion-ridden, and patrimonial system. Corruption, collusion and nepotism or

KKN, has come to symbolize the social costs, inequities, and abuses of the
Soeharto regime (Hamilton-Hart, 2001: 66), and has been also penetrating
the DGT.
There was a growing pressure on the DGT to have another tax reform
in 2001, although some new tax laws have been enacted a year before. The
pressure came from the outside, i.e. the IMF through the MOF. The IMF had
been giving assistance to the GOI/MOF/DGT since 1997. However, before
2001, the focus of IMF‘s assistance at the DGT was not specifically on good
governance practices. The current tax reform is seen as necessary, in line
with the spirit of reform in Indonesian bureaucracy.
In the meantime, enhancing democracy became a major agenda for the
post Soeharto regime. This agenda promotes people‘s spirit to implement
good governance practices in the public sector, including the DGT.
Therefore, the role of the DGT, in a democratic Indonesia, has become more
important, as societies need a modern democratic public administration
including tax administration that will satisfy the public‘s requirements in the
best possible manner. Therefore, the DGT must continually change and
adjust itself to satisfy two requirements. It must be effective and efficient in
collecting tax and providing tax services and law enforcement, and it must
also satisfy the democratic requirements such as fairness, justice and
transparent, and accountable. Thus, putting good governance elements into
the tax reform, as a result, is a response of the DGT in supporting demo-
cratization process in Indonesia.
The current reform process initiated since 2001 is the fourth major tax
reform after the 1980s. The reform was led by the DGT‘s Modernization
Team, which received assistance from international donors. Learning from
past reforms that disregarded good governance practices, the current reform
incorporated good governance elements into the reform initiatives to create a
more effective and efficient administration by making procedures more
transparent, systems that are more accountable, and improving the officers‘
integrity. This current reform aims to have more public trust in the DGT,
more productive officer, and better tax compliance. A new governance
framework has been developed based on the principles of combating corrup-
tion, i.e. clear specification of the norms for acceptable and unacceptable
behavior, an appropriate set of incentives and disincentives to encourage
acceptable behavior, and creation of a mechanism for detecting and
punishing violations of the norms.
420 Limits of Good Governance in Developing Countries

The adoption of good governance is crucial for tax administration, yet

there is no universal agreement as to how to measure good governance.
Good governance is a normative concept and not easy to be measured. How
to measure good governance is rather based on analytical frameworks that
are also normative. Anyhow, efficiency and effectiveness can be seen as the
quantitative aspects of good governance, while the others such as partici-
pation, transparency, and accountability are qualitative ones. Therefore,
governance can be measured in terms of efforts or results.7 As two main
tasks of tax administration reform are achieving higher effectiveness or
capacity to achieve high level of tax compliance, and efficiency or capacity
to make administrative costs per unit of tax revenue as small as possible
(Ott, 1998: 9-11). A tax administration is considered effective if there is a
high tax compliance ratio, and it is efficient when the administrative cost
ratio is low.
The reform continues. The GOI has launched the Indonesian Adminis-
tration Reform Phase 2, which is well known as Project for Indonesian Tax
Administration Reform (PINTAR). The project is led by the DGT‘s Team,
which received assistance from the World Bank, the TAMF, Japan
International Cooperation Agency (JICA), and other donors. The PINTAR
focuses more on developing Information Technology, Management
Information System and Human Resources Management Information Sys-
tem. Hopefully, the PINTAR will be finished in 2014 and can produce
significant improvement to management and information system.

2. THE MODERNIZATION OF TAX ADMINISTRATION

Implementing tax policy in an increasingly globalizes world is

becoming more challenging for tax administrators, including the DGT.
Recognizing this, the DGT has been modernizing its administration since
2001. In doing so, it established the Taxation Modernization Team with the
help of international donors such as the IMF, AUSAID, CIDA, and JICA.
The current tax administration reform is well known as the Moderni-
zation of Tax Administration, later it is called the Tax Administration
Reform Phase 1. Within the context of democracy and a more transparent
society, the current reform draws much public attention. It has the element of
public participation. The reform continues despite the many tax scandals
involving tax officers and taxpayers as exposed by media and some
concerned citizens.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 421

2.1 The Objectives of the Modernization of Tax Administration

The objectives of the Modernization of Tax Administration are to
increase taxpayer compliance, to enlarge public trust in tax administration,
and to improve the productivity of tax officer.5 The soul of the reform is the
implementation of good governance.

2.1.1 Increasing Taxpayer Compliance

The level of noncompliance in Indonesia is considered very high (see
Nasucha, 2004 and Rizal, 2001). This high level of noncompliance is a very
serious problem. It can reduce the needed resources to finance public
services and increase the tax burden of those individuals and businesses who
dutifully comply with the tax laws. However, it has never been easy to
persuade citizen or taxpayer to voluntarily comply.
One of the modernization program‘s guiding principles for improving
compliance is to make the tax system easy for taxpayers to comply with.
According to the IMF, the current tax system poses major compliance
burdens for taxpayers in terms of uncertainties in the laws and countless
regulations, complex tax returns, excessive information reporting require-
ments, and poor taxpayer services (1998). These costs discourage voluntary
compliance and, no doubt, have contributed significantly to the large
numbers of taxpayers who, intentionally or unintentionally, fail to fulfill
their tax obligations.
To improve taxpayer‘s compliance, the DGT has formulated and im-
plemented strategies on program and activity which can keenly increase
taxpayers‘ attentiveness and voluntary compliance, especially for the non-
compliance taxpayer, for service improvement, higher compliant from the
taxpayers‘ side, and effective law enforcement. The DGT also conducts tax
awareness campaign as well as tax service development.
The modernization program also seeks to increase taxpayer com-
pliance by strengthening the DGT‘s capacity to take enforcement action
against noncompliant taxpayers. For a system based on self-assessment to be
effective, taxpayers must believe that if they or their competitors fail to
comply with their tax obligations, there is a reasonable chance that they will
be caught. Once they are caught, sanctions will be imposed and are sufficient
to offset the potential benefits of noncompliance.
———————
5
See Strategic Paper of the DGT, Ministry of Finance Decree No. 85/KMK.03/2003.
2003/03/07.
422 Limits of Good Governance in Developing Countries

2.1.2 Increasing Public Trust in Tax Administration

Based on the research by the Partnership for Governance Reform
(2001), many taxpayers in Indonesia have little confidence in the fairness of
tax administration because they see themselves as vulnerable to arbitrary
actions of tax officers. They do not have recourses to dispute a resolution
system that is fast, low cost, and impartial. Faced with this situation,
taxpayers find it more practical and less risky to collude with tax officers
instead of declaring what is owed under the law. This eventually results in
loss of revenue for the government and loss of integrity for the tax
6
administration.
In year 2003, Consumer News Magazine, published by Indonesian
Consumer Foundation (Yayasan Lembaga Konsumen Indonesia/YLKI),
questioned 2,236 consumers on why they do not want to pay taxes. 41% of
the consumers answered that they do not believe that taxes they paid would
return to them (or benefit them). 7 For gaining trust from taxpayer, Prof.
Boediharjo suggested that the DGT should change its image towards a more
friendly and pleasing organization to taxpayers. The Corruption Eradication
Commission/Komisi Pemberantasan Korupsi (CEC/KPK) Chairman,
Taufiqurrahman Ruqi, suggested the DGT to curb corruption by improving
the system and not merely by punishing the small corrupt tax officers.8
Anwar (2006) indicates that public perception on the DGT was built
on arrogance and absolute authoritarianism, excessive riches, and bureau-
cratic mentality that the tax officers possess. The perception of tax officers‘
arrogance was developed from the bad experiences of taxpayers or tax
consultants in dealing with tax officers. The perception on excessive wealth
possessed by the tax officers is based on what the public observe and see in
daily life. This perception is developed base on the assumption that tax
officer has a total property value that is impossible to earn in their lifetime

———————
6
At Seminar on the DGT Reform toward Good Governance at Nikko Hotel, Jakarta
2006/02/04, Mas Achmad Daniry, the Chairman of Good Corporate Governance Com-
mittee of ICCI, argued that the main problem of Indonesian taxation is the distrust between
taxpayer and tax officer. While tycoon Mochtar Riady confessed that he ever cheated in
paying taxes because the tax officer did not trust his truthful return (―Due to Distrust,
Businessmen Cheat on Paying Taxes,‖ Media Indonesia Newspaper. 2004/ 8/31).
7
Indah Suksmaningsih, the Chairman of Indonesian Consumer Foundation (YLKI) on
Transparency of the DGT: as Enhancement of Good Governance. p. 162.
8
Prof. Boediharjo, the Chairman of Rector Forum and Chairman Ruqi share their view on
Transparency of the DGT: as Enhancement of Good Governance. 2005.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 423

work. Bureaucratic mentality, which is commonly found in civil service, has

emerged due to conceited attitude of being a state official not a civil servant.
To improve this situation, the modernization program also aims at
restoring the taxpayers‘ trust in tax administration. The modernization
program‘s main strategies include image enhancement of the DGT in the
eyes of the public and adoption of the pilot project offices as a model to the
rest of the administration. To improve its image, the DGT tries to amend the
tax laws, to implement good governance framework, to improve objection
and appeal mechanism, and to improve audit procedure.

2.1.3 Increasing the Productivity of Tax Officer

To increase tax officer‘s productivity, the medium-term modernization
program seeks to establish a quality work environment that promotes high
performance and accountability for results. This productivity improvement
has been a recurrent theme of tax reform. Currently, this issue involves
motivating, training, compensating, and also overseeing tax officer. A
common problem is the provision of adequate and competitive compensation
structure. However, since remuneration is generally governed by budgetary
constraints and general rule of civil service, other approach has been adopted
such as provision of the Additional Financial Allowances.
To accomplish this third goal, the DGT has been conducting a pro-
gram on improving the organizational structure that covers reorganization,
improvement on monitoring capacity and superior‘s guidance, formulation
of new human resource management policy, and improvement in working
facility and infrastructure.

2.2 What Areas Being Reformed?

Since 2001 the GOI has been gradually implementing tax adminis-
tration reform initiatives to strengthen tax collection and to improve the
governance of tax administration. In general, the modernization focuses on
(a) organization; (b) business process; and (c) human resources management.

2.2.1 Organization
To catch up with the development of business sector and to adapt with
changing environment, the DGT has to innovate and do continuous
improvement in its organization. The DGT has been shifting from type of
424 Limits of Good Governance in Developing Countries

tax-based organization structure into functional based organization structure

(see Figure 12.1).

Figure 12.1. The Evolution of Organizational Design Ideas for Tax Administration
Tax Focus Function Focus Taxpayer Focus

Registration

Accourding

Personal Taxpayer Education Medium/

Sales Corporate Large
Functions Income Small Individuals
Tax Tax Businesses
Tax Collection Businesses

Audit

Appeals

Source: Ebrill, Keen, Bodin, and Summers (2002: 135) as cited by McCarten (2003).

The DGT has realized that the type of tax-based organization resulted
in inefficiency, through duplication of functions (see also Rizal, 2001).
Moreover, the functional-based organization is characterized by grouping the
staff based on essential administrative functions such as processing tax
returns and payments, audit, and arrears collection.
The reorganization began with the establishment of large taxpayer
9
units mainly driven by the presence of the IMF. In this initiative, the tax
service offices, tax audit offices and land and building tax offices were
liquidated and the service is handled by Large Taxpayer Office (LTO),
Medium Taxpayer Office (MTO) and Small Taxpayer Office (STO) which is
dependent upon the contribution and the size of the taxpayers.
In new modern tax offices, taxpayer‘s compliance is monitored and
evaluated by Account Representatives (AR), a new position to serve tax-
payers with the help of the advanced information technology. The company
profile of each taxpayer is utilized to gain more knowledge of taxpayer‘s
business. In detail, the functions of AR are to develop and maintain tax-
payers profile and data, to supply data to other units, to give ruling and
counseling service, to monitor tax return, to monitor taxpayers‘ compliance

———————
9
Many of the 40 countries surveyed in the IMF‘s study reported that the setting up of a
large taxpayer unit helped them address major operational weaknesses in tax admi-
nistration and to visibly improve core tax administration functions (Baer, Katherine et al.
2002)
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 425

and analyze the service, to monitor tax revenue collection, and to process tax
refund claim.
This initiative is intended to achieve a quantum improvement in the
performance of the DGT by substantially strengthening taxpayer services
and enforcement program, customizing them to the circumstances of small
and medium taxpayers, and establishing greater accountability of managers
and tax officers. The foundation of the segmentation of taxpayers is based on
the premise that different groups of taxpayers have different needs of
services and pose different risks of noncompliance. The reorganization into
modern tax offices was completed at the end of 2008.

2.2.2 Business Process

In the reform of tax administration the importance of tax structure is
clearly reflected, because tax administration and tax structure are inter-
connected and they have to be improved simultaneously in the tax reforms
(The World Bank, 1991). Simplification of rules and procedure is an impor-
tant way to increase the effectiveness and efficiency of the tax administration
business process. For example, a simple tax forms and filing procedure can
minimize both administration cost and taxpayer compliance cost.
The transformation of business process is a key pillar of the strategy in
modernizing the operations of the DGT. This will make the tax system easier
for the taxpayers to comply with and for the tax officers to administer. The
transformation of business process is also closely related to the utilization of
adequate and appropriate IT. For organizational strengthening, particularly
in the decision support system, IT is a very important key factor. Without IT
improvement, innovation in business sector will never be caught up by the
DGT. Moreover, the utilization of adequate IT will enhance transparency
and minimize misconducts and abuse.
In fulfilling its ambition to become a modern ‗world-class‘ tax admi-
nistration, utilization of IT to support the DGT operations is indispensable.
The IT, combined with such communications technologies as the Internet,
enables citizens to self-register, download forms and regulations, etc. This
initiative is also popularly called ―e-government reform.‖ The e-government
system may lead to greater transparency, accountability, and reduce adminis-
trative corruption. As a result of this initiative, tax offices are brought closer
to the public, so that the public can see clearly the daily operations of the
DGT.
426 Limits of Good Governance in Developing Countries

To modernize and improve operations through increased use of IT

applications, the DGT has developed the DGT Information System. The
DGT has also developed the e-SPT (e-filing) and e-payment systems. E-SPT
is a software application to facilitate taxpayers reporting of their tax returns.
The e-payment has been designated as excellent services to taxpayers and
immense importance to having timely tax revenue as well as improving the
DGT performance, transparency and accountability. Due to the lack of capa-
city, the DGT outsourced some of the system development job to external
resource/vendors. A set of web pages has been also provided as incentives to
third parties to increase e-filing, in addition to providing electronic customer
account management capabilities. The DGT has also developed the Data
Processing Center that gathers data from tax returns, tax payments, and
third-party reports.

2.2.3 Human Resources Management

The initiatives to develop human resources seek to increase the capa-
city of individuals to carry out their duties and, ultimately, will result in
higher productivity, tax compliance and higher public trust in the DGT.
Reform in human resource is critical to achieving sustainable performance
improvements. To strengthen the capacity of officers inherently requires
fundamental changes in their behavior. This includes officers‘ sense of
vision, mission, and goal, desire to work effectively and efficiently, and
commitment to integrity and best taxpayer service.
The present demands and expectations concerning the performance of
the DGT staff are high and will be much higher in the future. In this regard,
there is a high need for a competent and skilled workforce with multifunctio-
nal talents. There will be less demand for low skilled officers, as expecta-
tions and performance become more complex. It is very important also to
develop disciplined and efficient offices with good human relations. In this
context, to improve voluntary compliance on the part of taxpayers, the DGT
should act in fair and impartial way. Taxpayers will find it easier to be
approached by the DGT if it has combined right attitudes with best
performance.
To increase the capacity of human resources, the DGT has introduced
the reform on human resources management policies including modern
office staff selection procedures, the creation of special allowance, and
training in tax management and procedures for new and existing tax officer.
It also includes formulation of a comprehensive set of performance evalua-
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 427

tion measures, establishment of new job classification system, introduction

of a new appraisal system, and setting up the sustainable new compensation
system.

2.3 Issues on Good Governance

The issue of corruption is a high concern and the GOI and the DGT
recognize the serious effects on tax revenue of such behavior have to the
business community and foreign investment. As a capacity building initia-
tive, the tax administration reform helps the DGT in curbing corruption in
the DGT. Eventually, professional tax officer with integrity will enhance
productivity, tax compliance, and improving the image of the DGT in the
eyes of public.
Good governance exists where the DGT is perceived to have acquired
this power legitimately, and there is appropriate voice accorded to those
whose interests are affected by decisions. Good governance should result in
performance that is responsive to the interests of taxpayers and other
stakeholders. In addition, good governance cannot be said to prevail unless
there is genuine accountability at play between the DGT as the agent and the
GOI as the principal. Accountability cannot be effective unless there is trans-
parency and openness in the conduct of the organization‘s work. Finally,
governance should be fair, which implies conformity to the rule of law and
principles of equity. The failure of the DGT‘s program in trying to push for
more accountability within the DGT might cause no change in public trust in
the DGT.
As a part of its tax administration reform strategy, the GOI has pre-
pared a governance framework aimed at promoting transparency in tax
administration and integrity among tax officers. The good governance initia-
tives implemented by the DGT includes the establishment of governance
unit, code of conduct (COC), e-government, complaint centre, and a tele-
phone hotline for large taxpayers to report the misconduct of tax officers.
Meanwhile, the MOF has established the Investigation Unit of the Ins-
pectorate General and Commission on Taxation Monitoring.
428 Limits of Good Governance in Developing Countries

3. LESSONS FROM INDONESIAN TAX ADMINISTRATION

REFORM

Almost ten years have passed after the DGT launched the reform with
a new paradigm involving good governance elements. Reforms need time
and results always depend on the criteria underlying the evaluation.
However, some lessons can be drawn from the Indonesian experience with
the current tax administration reform.

3.1 Effectiveness and Efficiency of Tax Administration

In general, if we compare the effects of current reform on tax
compliance with the previous ones, we can see that there have been few
improvements except for improving the collection of tax arrears. In contrast,
tax revenue has increased remarkably. In the middle of the current economic
slumps, simply making changes in tax structure, such as raising all tax rates
or broadening tax base as previous reforms did, would not be effective due
to the high tax gaps. Further, an increase in tax revenue may come from
sustainable administration reform that can overcome the present short-
comings such as inadequate legislation, poor organization, inefficient human
resources, and corruption.

3.1.1 Effectiveness
Tax Revenue. Since the 1980s tax reform, the watchwords have been
the accomplishment of tax revenue target through improvement on three
pillars: service, counseling and audit. However, in addition to internal
factors, tax revenue also depends on external factors over which the DGT
has no control. The tax base of Income tax, VAT and import duties depends
on the impact of general economic trends. Furthermore, the tax culture is
affected by the quality of public services and infrastructure provided by
other government agencies. Therefore, it is remarkable that during the
economic recovery after 1997, the DGT could achieve the tax revenue target
no matter how high it was up to 2008. This suggests that the operation of
DGT has become more effective and efficient.
Up to 2008, the reform is a success in terms of meeting tax revenue
targets. As we can see in Table 2, tax revenue growth was 73.4%, 10.6%,
9.8%, 12.5%, 20.5%, 20.4%, 18.3%, and 25.3% from year 2001 to 2008,
respectively. On average, the growth of tax revenue is 23.9% from 2001 to
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 429

2008. The contribution of tax revenue was more than 75% of the state
revenue in 2008 and the tax ratio rose from 11.9% in 2000 to 13.3% in 2008.
The increased tax revenues for the period 2001-2008 was also
influenced by the improvement in macroeconomic situation and the prudent
management of monetary and fiscal policy. The GDP had been growing but
still below the pre-crisis growth, which was 7% in average. To date,
Indonesia‘s overall macroeconomic picture is stable and improving. The
GOI has succeeded in pushing forward its reform plan, including tax reform.
430 Limits of Good Governance in Developing Countries

Lessons from Indonesian Tax Administration Reform Phase I (2001-2208)

Table 12.2. Tax Revenues 1989/1999-2008 (in billions of rupiah)
Fiscal Year VAT Income Tax Excises Property Tax Other Taxes Import Duties Export Tax Total GDP 3) Ratio (%)

FYP V
1989/90 5.986,10 5.754,80 1.482,20 604,4 191,1 1.892,20 173,30 16.084,10 148.101,8 10.9
1990/91 8.119,20 8.250,00 1.799,80 785,8 216,5 2.799,80 39,80 22.010,90 172.840,3 12.7
1991/92 9.145,90 9.727,00 1.915,00 944,4 298,8 2.871,10 17,10 24.919,30 200.702,1 12.4
1992/93 10.742,30 12.516,30 2.241,60 1.106,80 252,4 3.223,30 8,80 30.091,50 236.644,4 12.7
1993/94 13.943,50 14.758,90 2.625,80 1.484,50 283,4 3.555,30 13,70 36.665,10 308.184,4 11.9

FYP VI
1994/95 16.544,80 18.764,10 3.153,30 1.647,30 301,9 3.900,10 130,60 44.442,10 365.750,9 12.2
1995/96 18.519,40 21.012,00 3.592,70 1.893,90 452,8 3.029,40 186,10 48.686,30 433.110,4 11.2
1996/97 20.351,20 27.062,10 4.262,80 2.413,20 590,7 2.578,90 81,00 57.339,90 511.365,4 11.2
1997/98 25.198,80 34.388,30 5.101,20 2.640,90 477,8 2.998,70 128,50 70.934,20 633.520,5 11.2
1998/99 27.803,20 55.944,30 7.732,90 3.565,30 413 2.305,60 4.630,20 102.394,40 947.659,8 10.8
1999/00 33.087,00 72.729,00 10.381,20 4.107,30 610,9 4.177,00 858,60 125.951,00 1.138.115,8 11.1
(continued)

430
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 431

Limits of Good Governance in Developing Countries?

Table 12.2. Tax Revenues 1989/1999-2008 (continued)

2000 35.231,80 57.073,00 11.286,60 4.456,10 836,7 6.697,10 331,20 115.912,50 971.502,6 11.9
2001 55.957,00 94.576,00 17.394,10 6.662,90 1.383,90 9.025,80 541,20 185.540,90 1.684.280,0 11,0
2002 65.153,00 101.873,50 23.188,60 7.827,70 1.469,30 10.344,40 231,00 210.087,50 1.863.275,0 11,3
2003 77.081,50 115.015,60 26.277,20 10.905,30 1.654,30 10.884,60 229,70 242.048,20 2.045.853,0 11,8
2004 102.572,70 119.514,50 29.172,50 14.685,20 1.872,10 12.444,00 297,80 280.558,80 2.303.031,0 12,2
2005 101.295,80 175.541,20 33.256,20 19.648,60 2.050,20 14.920,90 318,20 347.031,10 2.774.281,1 12,5
2006 123.035,90 208.833,10 37.772,10 24.043,00 2.287,40 12.140,40 1.091,10 409.203,00 3.339.216,8 12,3
2007 154.526,80 238.431,00 44.679,50 29.658,90 2.737,70 16.699,40 4.237,40 490.988,70 3.950.893,2 12,4
2008 209.647,40 327.497,70 51.251,80 30.927,40 3.034,40 22.763,80 13.578,30 658.700,80 4.951.356,7 13,3

Source: Financial Notes and Budget.

Notes:
1) Since Fiscal Year (FY) 1999/2000 including Income Tax on Oil and Gas. 4) Period from April 1st to December 31st, 2000 (9 months).
2) Since FY 1998/1999 including Duty on Land and Building Transfer. 5) Adjusted to new classification.
3) Since FY 1989/1990 - 1998/1999 GDP Non Oil, FY 1999/2000 - 2006 Total GDP.

431
432 Limits of Good Governance in Developing Countries

In addition to the national economic condition, the highest tax revenue

performance in 2008 also attributed to the high global oil price and the
taxpayers‘ positive response on Sunset Policy. Still, tax revenue remains low
at 72% in average. In countries with more fully developed tax system, the
tax potential could be 80-85% (Gitte, 1993: 6). The tax ratio is still relatively
low in comparison to other Asian countries. It was also lower in comparison
to the 14% in average tax ratio of Latin American Countries. In developed
countries, the tax ratio could be 40% or more (Musgrave and Musgrave
1980: 332-333). Among ASEAN countries, Singapore had the highest ratio,
22.4%. The average ratio for the original five ASEAN countries was
16.98%, while the Indonesian tax ratio was only 11.31% from 1985 to 1995
(Rizal, 2001: 4).
On the other hand, since the crisis, Indonesia‘s economic growth has
by and large relied on consumption, government consumption in particular
(The World Bank, 2003a: 2). In addition to successful simplification admi-
nistration of VAT, the significant increase ratio of VAT happened due to
removal of some tax facilities such as tax exemption and the government-
borne VAT for specific goods and services, which were previously granted
by 1994‘s reform.
Tax Compliance. The current reform has led on the improvement in
the number of registered taxpayers. The number of registered taxpayers
increased significantly from 2.52 million in 2001 to 3.69 million in 2004. Of
that number, 2.63 million were individual taxpayers and 1.06 million were
corporate taxpayers in 2004. The figure for registered individual taxpayers
was still very low in comparison with 93.72 million workers (National Labor
Survey, 2004). In countries such as Indonesia, where the underground
economy is big at 19.4% (Schneider, 2004: 8),10 the number of unregistered
taxpayer is also big.
In 2005, the DGT launched a crash program on 10 million of Tax
Identification Number (TIN). Instead of waiting for the people to voluntarily
register themselves as income taxpayers, the DGT has been aggressively
mapping potential taxpayers who remain outside the tax net through their
property and car ownership, credit cards, citizen registration and other
financial transactions. And based on this data, millions of new taxpayer
registration numbers have thus far been officially issued and mailed to

———————
10
Schneider, Friedrich. 2004. Shadow Economies of 145 Countries All Over the World:
Estimation Results over the Period 1999 to 2003. http://www.dur.ac.uk/john.ashworth/
EPCS/Papers/Schneider.pdf
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 433

taxpayers resulting in additional registered taxpayer as much of 6.3 million

taxpayers within one year (October 2004-October 2005) by official regis-
tration.11 By this program the number of Individual and corporate taxpayers
increased into 9,785,511 and 1,134,559, respectively.
Sunset policy, the softest type of tax amnesty that granted by the GOI
to noncompliant in 2008 also contributed to the increasing number of
individual taxpayers. The results of Sunset Policy are the increasing number
of taxpayers as much of 5,365,128 and the increasing tax revenue as much of
Rp7.46 trillion. The policy is to provide to individual who voluntarily
registers to get TIN during Sunset Policy period and submit 2006 and
previous year‘s tax return and to individual and corporate taxpayers who
revise their 2006 and previous years‘ tax return during Sunset Policy period.
As of January 1 2009, the number of taxpayers was 15,469,590, which
consists of 13,861,253 individual taxpayers and 1,608,337 corporate tax-
payers. Yet, the filing compliance has not improved significantly, as the
number of registered taxpayers who stopped filing their return is increasing.
The filing gap ranged from 65% to 62% between 2004 and 2005 (DGT
2005, 2004), and 65% to 58% between 2000 and 2002 (Nasucha, 2004: 11).
As of January 2009, the ratio of stop filer is approximately 47.39%.
Apparently, the DGT has dealt systematically with stopfilers, taxpayers who
stop filling their tax return.
Among the effective registered taxpayers, not all of them report their
taxes correctly as reflected in the result of the tax audit showing many
audited taxpayers substantially under-reporting their tax base year by year.
65% of the audit performed was refund claim-audits.12 The productivity of
tax auditor is also low as there were 44,278 (35%) incomplete audits in
2004. This low productivity is an obstacle to tax realization.
Of tax arrears, some tax bearers do not have good intention to pay tax
arrears even they have capacity to fulfill their obligation. There are various
ways to avoid paying tax arrears committed by taxpayer, i.e. liquidating the
company or filing bankruptcy, changing the company‘s management, share-
———————
11
See also 2005 Minister of Finance‘s Report. According to this report, this was due to
extensification program after cross checking process between DTI data and National
Master File. The data for cross-checking came from land and building ownership, luxu-
rious car ownership, luxurious boat ownership, residential data and others. (Anwar 2005).
12
The tax audit performed by the DGT is not effective since it focused too much on the
refund audit as stipulated by the legal requirement that all refund claims had to be audited
regardless of the reliability of the refund claimants. Therefore, nonproductive audits are
performed every year, which also worsened compliance level in paying the tax due and
increasing tax arrears.
434 Limits of Good Governance in Developing Countries

holder, or board of directors, etc., which effects in changing the tax bearer,
or transferring company‘s assets to another company. The tax arrears with
more than 5 years constitute more than 40% of total national tax arrears in
2008. With annual inflation rates of 6-7% or more during the period, the
revenue loss in real terms can be substantial.

3.1.2 Efficiency
For the tax revenues during the current reform, the collection cost is
perceived to be low. For example, only 0.33% was needed for each rupiah
collected in 2001, 0.58% in 2002, and 0.56 % in 2008 (see Table 12.3). This
collection cost is low in comparison with the 2.0% figure of developed
countries. 13 Before the reform, these figures may be biased, since some
operations were financed by either individual money or off-budget funds. In
the past, the utilization of tactical budget might have helped the DGT
lowering the costs of collection but this is against good governance
practices.
The dynamics of tax administration reform makes the needs of
operational fund increasing. The fund is not only used for human resources
training and incentives, but also infrastructure development and mainte-
nance, IT development, and reorganization. From the table below, there was
almost double leap of the expense in year 2002, in comparison with the
expense in year 2001, due to increasing on modernization cost. Gradually,
with the effect of modernization, this collection cost decreased with the
simplicity of the tax law and more effective administration. Part of this
administration cost can be shifted to taxpayer as compliance cost through
legal and procedures.

———————
13
In 2000, when Indonesian COTCR was 0.34%, Japan was 2.40%, Taiwan was 1.57%,
Hong Kong was 1.31% and Singapore was 0.95% (DGT 2005: 33).
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 435

Table 12.3. Cost of Tax Collection Ratio

Routine Expense Tax Revenue adm. by the

Year Ratio
(trillion rupiah) DGT (trillion rupiah)
2001 0.52 158.58 0.33%
2002 1.03 176.32 0.58%
2003 0.93 204.66 0.45%
2004 1.08 238.98 0.45%
2005 1.31 298.34 0.44%
2006 1.43 358.05 0.40%
2007 2.41 426.23 0.57%
2008 3.21 571.10 0.56%
Source: DGT Reports. 2009.

3.2 Good Governance Practices

The difference between the current reforms with previous reforms is
found in the implementation of good governance. However, does this mean
that clean institution considerations matter in reforming the DGT? The
answer to this question is ―yes,‖ since to a certain extent, the goal of having
clean government has been redefined and transformed into having good
governed institution to make the DGT a world-class tax authority. However,
there also seems to be increasing acceptance of the notion that the DGT, as
an institution, may play rhetorical game and not serious with the reform. The
goals of tax reform may be utopian due to the intertwined relationships
among government institutions and ties among three development actors as
corruption is hampered. Moreover, the DGT also has to keep equilibrium
between the main stakeholders‘ desires. The GOI, in general, wants tax laws
that can encourage investment and help in restoring the economy, the
taxpayers/public want a business-friendly and clear tax laws with minimal
discretion for tax officers, while the DGT wants an effective tax laws that
can enhance taxpayer compliance and tax revenue.
Good governance is at the top of the DGT agenda. Many programs
have been conducted. However, the question remains ―why corruption still
exists?‖ Attitudes have changed so dramatically not because of internal good
governance framework but because of fear towards the CEC/KPK. Officers
are quite aware there are fewer opportunities for bribery and taxpayers are
also afraid of being trapped. Ultimately, the taxpayers and other citizens may
436 Limits of Good Governance in Developing Countries

also suffer from corruptible justice system, which has institutionally

collapsed.14
Ten years have passed since the DGT started its efforts to combat
corruption. Some officers call the efforts naive and hypocrisy when the
Gayus Tambunan case exploded in March 2010. It is not that the negative
consequences of corruption are unknown, but rather, those who live under
conditions of endemic corruption tend to be fatalistic, believing that the
problem is simply too big to solve, or people is already engaged in social
anime. The good governance initiatives are perceived as weak due to the
difficulty in breaking the old habits.

3.3 The Good Governance Elements in Practice

The good governance of the modernization program emphasizes
transparency and accountability. Participation and equity have become the
content of the initiative in line with the increasing participatory of stake-
holders and demand on equity from taxpayers. Meanwhile, effectiveness and
efficiency have already been part of tax administration reform for long.

3.3.1 Participation
The vital role of the DGT and tax revenue for sustained economic
growth and sustainable development financing underscore the need to
introduce and sustain participatory processes in overseeing the operation of
the DGT and processes of tax law making. Participation from all stake-
holders, especially by the taxpayers in the accountability processes of tax
administration, is critical to the timely and full realization of the good gover-
nance framework implemented by the DGT. Understanding what is needed
to improve such processes and institutionalizing reform in the laws, regula-
tions, and practices of decision making is the goal of the enhancement of
participation in tax reform. This means engaging all stakeholders including
the GOI/MOF, tax officer, business actors, civil society organizations, and
the least disadvantaged in the decision-making processes through participa-
tion in policy formulation, implementation, monitoring and review. In this
context, tax law drafting is one of the entry points for civil society
participation.
———————
14
Sebastiaan Pompe (2005) discussed comprehensively the collapse of Indonesian judicial
system in his book ―The Indonesian Supreme Court: A study of Institutional Collapse.‖
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 437

There is considerable difference between the current reform and the

previous one, particularly the 1980s reform, in the aspect of participation.
The current reform follows the process in formulating and approving the law
that is stipulated by the Presidential Instruction (INPRES) No. 15/1970, 15
while the 1980‘s‘ reform ignored it. This is due to the adoption of a low-key
approach in the 1980s‘ reform by the GOI. According to Gitte Heij (2001),
this approach was adopted with the impossibility of the hired foreign adviser
to be on the ground but liaised with the resident consultants and the MOF
bureaucrats. 16 Therefore, there was no public discussion and the foreign
economists involved in the tax reform team agreed with this strategy. They
believed such discussion would only complicate the task and increase the
risk of producing simple tax laws due to the possibility of groups lobbying
for particular tax incentives. A similar thing happened to other previous
reforms (1990s and 2000). It is understandable since the role of government
was quite strong particularly in the 1994 reform when President Soeharto
was in power.
The situation has been quite different in the ―Reformation Era.‖ The
desire to participate in every policy decision making is high; there is demand
for transparency, including in taxation area. The participation of the business
association and other parties in drafting the tax laws was not minimal but
significant. Such enthusiasm and active participation required more time in
drafting the new tax law. Obviously, the benefit of encouraging participation
is that it helps provide reliable information concerning taxpayers/public
interests. In the end, the draft did not only accommodate this group but also

———————
15
The process for formulating and approving a law is as follows:
• The department seeks to have President‘s approval for preparing a law in relevant
policy area;
• Following the approval, the initiating department forms an inter-departmental team to
prepare the law. At this stage, the private sector might be involved in the preparation of
the law up to certain point of the process;
• After having clearance from the Cabinet Secretariat and approval from the President,
the draft is sent through the State Secretariat to the parliament. At this stage, public
participation is possible in the forms of hearing;
• After adopted by the DPR, the GOI has to formulate the necessary implementing
regulation. (Rohdewohld, 1995: 46-47).
16
Williamson was in charge of the specific legal issues and Malcom Gillis for the main part
of the work. The Harvard Institute for International Development (HIID) experts worked
on a ‗fly-in fly-out‘ basis, and were often in Indonesia no longer than one or two weeks to
assess the situation, mainly in the period between 1981–83. In most cases, Gillis
summarized the advice from the various foreign advisers and sent the summaries to the
Minister of Finance Wardhana and DG Salamun.
438 Limits of Good Governance in Developing Countries

the interests of the GOI and the DGT. Though certainly, there are some parts
that did not satisfy each party.
Another form of participation is monitoring the day-to-day operation
of the DGT. The mass media, nongovernmental organizations, most notably
the Transparency International chapter Indonesia and Indonesian Corruption
Watch, the business sector, such as the Indonesian Chamber of Commerce
and Industry, the Indonesian Tax Consultant Association, and the academe
continuously criticize the DGT for bribery practices. This, however, has
helped significantly in promoting action against corruption in the DGT.
The DGT itself can also participate in curbing external corruption by
issuing tax treatment on bribes and following up the Financial Transactions
Report and Analysis Center (PPATK) and other third party tax crime data. It
is necessary for the DGT to create follow-up procedures that allow moni-
toring in the implementation of minimal standards and in reviewing the
instruments at regular intervals. Both aspects are crucial for further
development since corrupt people will seek new ways to continue to bribe.
Within an interconnected world, an effort to curb corruption will not
be independent from other parties‘ role. It is a part of a triangle in good
governance that includes governments, particularly a reformed DGT, tax-
payer (business sector), and the civil society organizations. In reforming the
DGT, however, it is still not aware that the media and civil society organi-
zations could be the closest allies or the strongest partners. Without the
media, the DGT would be practically helpless in its attempt to change its
image from one of the most corrupted institutions into a good governed one.
Citizens, as another stakeholder, also play important role in monitor-
ring the DGT‘s day-to-day operation and tax officer‘s good governance
practices. To enhance citizen participation, it is necessary for the DGT to
develop and improve access to information so that there would be an
improvement in public service and reduction on opportunities for corruption.
For this end also, it is necessary to establish a citizens‘ information center to
provide general guidance on how to access the DGT services and support the
DGT‘s good governance framework. However, this process takes time since
it evolves in the relationship of promises and actual performance. It also
requires building new relationships among stakeholders.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 439

3.3.2 Transparency
Transparency is widely viewed as a necessary condition for effective
corruption control and, more generally, for good governance. Lack of trans-
parency is likely to result in public or taxpayer ignorance. On the other hand,
transparency has limitation. For example, in case of law enforcement, the
DGT has to keep operating in secret to such extent to protect taxpayer‘s
rights.
To date, the DGT already has specific programs to put an end to
corruption within the organization, such as the implementation of COC and
establishment of the governance unit. Also, in regard to the fight against
corruption, echelon 2s, heads of tax office and tax auditors have been being
obligated to disclose their wealth and report it to the CEC/KPK. However,
the existing anti-corruption measures require more efficient and transparent
accountability, and guarantees for taxpayers to have access to information on
governance of the DGT. More importantly, the goodwill of the leaders to
implement the existing anti-corruption measures is necessary for more
consistency and transparency.
There is great human potential and environment for change and pro-
gress in the DGT today. This will enable the DGT to overcome the problems
of corruption. Today, both taxpayers and tax officers are witnesses of the
progressive adoption of the culture of transparency. This has undoubtedly
been a powerful incentive to restore the trust that should exist between those
who are governing and those who are governed. Likewise, transparency is
aimed to correct any distortions in the exercise of public functions of the
DGT including corruption practices.
The DGT tax officers operate in a changing world where the nameless
and faceless tax officer is becoming a relic of the past. Greater transparency
in the DGT operations due to public access to official information, coupled
with the efforts of an increasingly zealous media and well-organized interest
groups, means that tax officers today work in a virtual aquarium. Their
actions are more visible and publicized as well as their mistakes and mis-
behaviors. They face higher public expectations on the quality of tax services
and their capacity to deliver them. If these conducts are not met, the result is
taxpayer‘s dissatisfaction.
The openness and transparency of the new DGT will open the way to
improvements in good governance. Although it is still in the infant stage
much has to be done first, the progress can already be seen such as the on-
going legislation of the new tax law. Meanwhile, there have been real and
440 Limits of Good Governance in Developing Countries

significant changes in the way the modern tax offices operate over the past
few years including in enhancing transparency and communication with
taxpayers and other stakeholders and expanding channels for participatory
processes due to dissemination of reliable information to the taxpayers.
Substantial benefits were also derived from greater transparency through e-
government provided by the DGT.

3.3.3 Accountability
Accountability means tax officers need to account for their actions
and, in consequences, there is certain punishment when officers commit
misconduct. The concept of accountability is changing, with tax officer
being more visibly responsible for their duty to perform the task. Targeting
outputs for officers or field offices may induce managers to be more efficient
in performing their task. If they lack discretion in their resources but are
accountable in terms of good governance means that the manager is required
to maintain the taxpayers‘ and other stakeholders‘ interest.
The DGT has created a new government and citizen interface by
implementing IT or e-government initiative. The initiative eventually led to a
more transparent, interactive, and accountable tax administration. Using e-
government, taxpayers are able to fulfill their tax obligation without direct
contact with tax officers. When people are already aware that tax is vital for
the country‘s development, they may object to the methods by which tax is
obliged and collected. Therefore, e-government may improve accountability
and the extension of tax base and collection methods rather in addition to
law enforcement.
With regards to efficiency, accountability contributes to efficiency in
two ways. First, by targeting outputs, tax officer can be responsible for the
volume, timeliness, and quality of the tax services produced. Second, by
giving tax officer full discretion, they can apply their professional skills,
judgment, and information to select the most efficient mix of inputs.
Accountability also contributes to the rule of law and equity in monitoring
the conduct of tax officer and continuous education on good governance
practices to curb corruption.
Unlike corruption in other public sector, which is more on procu-
rement activity, corruption in the DGT mostly occurs as tax extortion and
bribery due to the characteristic of tax service. It consists of monopoly and
huge discretion and less accountability. This is in line with Klittgaard‘s
famous formula, ―Corruption = Monopoly + Discretion – Accountability‖
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 441

(1988). The aspect of accountability that should be considered here is feed-

back and feed forward. Taking into account the audit reports of the IG or
other oversights, they are useful in improving or strengthening or promoting
accountability.
Based on Article No. 36A of Law Number 6/1983 as amended by Law
Number 16/2000 on KUP, a tax officer who committed misconduct shall be
punished according to the applicable laws. The applicable laws for internal
law enforcement are Government Regulation (GR) No. 30/1980, GR No.
32/1979 and GR. No. 6/1979 and, GR No. 6/1966 on Civil Servant Dis-
missal, and Minister of Finance Decree No. 15/1985. The DGT has punished
more than 2,000 officers on the basis of these regulations to enhance
accountability practices from 2001 to 2008. The punishment varies from the
statement of unsatisfactory performance to discharge with dishonor.

3.3.4 Rule of Law

Some taxpayers believed that the legal framework of taxation is not
enforced impartially because of corruptible officer. In a non-democratic
regime, tax payment can be easily evaded, even defied, and this represents
political influence of top elites. At macro level, cronies have immunity from
law and impunity of violation. This has made the DGT and other law
enforcer reserved and reluctant to work for change. Therefore, tax evasion
has become a highly profitable business in which both the tax evaders and
tax officers share the benefits.
As far as the rule of law in taxation is concerned, the prime respon-
sibility is in the hands of the tax officer. When it becomes tax crime, the
DGT cannot act alone. It has to collaborate with police or prosecutor.
Through constant interaction with police and prosecutor as an institution, not
in individual cases, law enforcers can collaborate instead of being isolated
and ineffective or only partially effective, and the alliance would deter law-
breakers and infuse morale among honest tax officers.
Yet, there are important preconditions for the successful implemen-
tation of good governance elements, and these should not be ignored by the
DGT, which is striving to improve its image. In addition to improvement on
remuneration system, a reliable control is needed, either internal or external
controls. There are two elements for effective controls systems, namely,
workable rules and procedures, and patterns of behavior that accept the rules
and procedures as legitimate.
442 Limits of Good Governance in Developing Countries

The taxpayer and tax officer are respected equally by the rule of law.
It also allows the DGT and taxpayer to resolve disputes in a rational way.
The DGT can gain respect from the taxpayers if it can utilize its regulatory
capacity to establish and enforce the rule of law internally and externally. By
the rule of law, there should be no exceptions in statutory duties and tax
officer should face the liability in respect of negligence, default, breach of
duty or breach of trust, of which the officer may be guilty. By the rule of
law, people should have come to believe that corruption is no longer a
problem as it was in the past. This means that the struggle has been
successful. Nevertheless, the DGT has to have the right law in place
including sanctions. It is a legal framework that gives certainty to taxpayers
including the efficient mechanisms for monitoring and controlling officers
and for reporting and punishing acts of corruption.
The challenge is towards the restoration of the rule of law. This should
begin with clear and sound tax law. The DGT should constantly re-evaluate
the quality and efficiency of the tax services with participation from stake-
holders. However, the DGT alone is not enough. The DGT needs to work
together with other stakeholders to ensure that the rule of law is maintained.

3.3.5 Effectiveness and Efficiency

Effectiveness and efficiency in the DGT will not be achieved without
changing the culture and behavioral patterns of tax officer and, equally,
taxpayers‘ expectations of what a tax officer should deliver. An efficient,
effective and ethical DGT will ensure public confidence in the quality of its
service, in resisting corruption, and is accountable and transparent in its
functions.
For example, the IT/e-government initiative may increase the effecti-
veness and efficiency of the DGT in its day-to-day operations and it may
enhance integrity by increasing automation and transparency, improving
recordkeeping, and reducing interface with taxpayers. However, the e-
government is not an end in itself but a potent force that brings a valuable
prospective in achieving good governance in the DGT. It requires a
dedicated policy strategy and a willingness to adapt to new technologies and
leadership to overcome obstacles of many sorts- education, technical, infra-
structure.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 443

3.3.6 Equity
If the tax officers are corrupt, it will be impossible for taxpayer to
enjoy equal treatment. The DGT staffs are expected to act impartially and to
consider equity. If they receive kickbacks, they will not be able to act
impartially and fairly in their work and the public will lose confidence in
them.
To maintain equity, some functions perform by the DGT in enforcing
the law are audit, investigation, and collection to deter noncompliance
taxpayers and to keep the complying taxpayers in the roster. In addition,
penalty and sanction mechanism also play important role. However, this law
enforcement function and penalty mechanism has the potential to be used in
abusive manner. For example, a taxpayer, who failed to file the tax return
negligently, would be punished by imprisonment of a maximum of one year,
while non-filers would be fined equal to 200% of their unpaid tax. Although
the sanction is clear, the mechanism is seldom put into practice. Moreover,
there is an opportunity for some corrupt officers to benefit from the sanction
as a tool to negotiate or to extort taxpayers. In the end, the equity is far from
being achieved as the compliant taxpayer keeps paying the higher price.

3.4 Curbing Corruption

Is the DGT really committed taking effective and concrete action to
combat all forms of corruption, bribery, and related illicit practices? The
GOI has been concentrating on increasing tax revenue and the DGT has been
making big progress in the modern tax offices. The DGT believes that these
important tax modernization initiatives should be complemented by a
corresponding public institution and private sector undertaking. President
Yudhoyono, in his first Presidential speech, called for mutually supportive
actions by governments and the business community to curb corruption.17
More concretely, the DG asked the taxpayers to submit a correct tax return,
since a false tax return would be a source of tax corruption and collusion.18
The DGT officers, as the government‘s money collectors, are more
exposed than most other government agency officers. Corruption still exists
within the DGT, and it undermines the systems and tax officers. Hence,
strategies and mechanisms to promote integrity are critical for strengthening
———————
17
―SBY to Lead Antigraft Drive‖. The Jakarta Post, 2004/10/21.
18
―Korupsi Bermula dari SPT‖ (Corruption Starts from Tax Return). Kompas Newspaper,
2005/11/26.
444 Limits of Good Governance in Developing Countries

the DGT. Experiences in many parts of the world suggest that integrity may
be promoted by incentives. Specific tax administrative measures, many of
which have been addressed above as mechanisms for strengthening revenue
performance in their own right, also reduce the incentives and opportunities
for corruption.
The DGT has amended KUP rules with explicit requirements for a
high standard of ethics in performing its duty. The DGT also has proposed
provisions that criminalized misconduct of tax officers who incurred losses
in the government budget and who do not have commitment to eliminate the
practice of tax deductions for bribes. Specifically, the DGT also urged tax-
payers to promote honesty to report unreported tax dues and also trans-
parency in all tax matters. The DGT should ensure that the highest standards
of honesty and efficiency are truly practiced by tax officers, particularly in
tax law enforcement.
It is also crucial for the GOI to make a strategic decision to concen-
trate on the so-called supply side of corruption and not only focus on the
DGT. The distinction between the supply and demand sides of corruption
will prove to be rather artificial in the long run, thus prompt action is
essential to create strong momentum in the fight against corruption. The
logic is very simple, if the tax officers sign the COC and get the higher take
home pay, the influence of corruption into economies will be reduced, and
the capacity of all parties to strengthen development and democracy will be
substantially increased. These actions will simultaneously contribute to fair
competition among business entities.
It was quite clear that the GOI was unable in the past to deal with
what has become an overwhelming presence of corruption in the DGT, since
it had become habit. It is not necessary to wait until there is a perfect
instrument provided by the GOI to deal with the issues of corruption in the
DGT, or to wait for a reform towards the positive law in Indonesia, which is
conservative in requiring a high standard of proof. Therefore, the system has
worked to the advantage of the corrupt tax officers. The DGT may begin the
battles of corruption although the process is a daring, risky, and a long
drawn-out process, particularly in catching the big fishes. However, if the
DGT properly focuses on building trust not only between the tax officer and
the taxpayer, but also among tax officers, then the DGT can be a world-class
tax administration with integrity. In particular, if the top managers are
themselves transparent, they could facilitate trust or confidence in the anti-
corruption program.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 445

The DGT faces the agenda to concentrate on how money influences

tax officers. The DGT needs restructure the mechanisms and systems where
all these vices exist, as the world is one interconnected community and the
containment of corruption is not only the DGT‘s task. Therefore, the
measures against corruption needs very stringent and very consistent. The
GOI faces the agenda to establish new structures and intensify reforms that
will destroy the base of corruption in the DGT.
If a corrupt officer is found guilty, within the context of corrupt prison
system, it will not work to imprison the corruptor. The corruptor will bribe
the prison officers and have a very comfortable life in prison as enjoyed by
many corruptors in Indonesian prison. He may have a television set, internet
connection, cellular phone, and other luxury facilities, even ability to run his
business from prison. A strict punishment should be given to withdraw him
from the life enjoyment and to surrender his illegally acquired resources.
That is where the corruptor will feel the bitterness of prison life, not merely
serving three and half months or two years in prison. This is another thing,
which the GOI should seriously consider.
The attitude towards the media should be to encourage battle against
corruption, to publish and disseminate information about those found guilty
of corruption, and to ensure their social isolation and stigmatization. Laws
are necessary, but they are not the ends to all means in the fight against
corruption. The Indonesian society must have strong social sanctions
including stigmatization against the corruptor. The corrupt should not be
portrayed merely as criminals but also as societal rubbish so that no one
dares to commit corruption anymore. Sociological theories of deterrence
suggest that one of the reasons people obey the law is because of fear of
social disapproval (Brooks, 2001: 25).
In line with the probability of being caught, to increase the cost of
crime to the point at which these costs outweigh the benefits of corruption,
penalties should be severe enough to provide incentives for people to comply
with the law. Also, they should be severe enough to reassure people that
there are adverse consequences for those who commit corruption.
That is the enabling environment that should be created if the GOI, the
DGT in particular, is really serious in the battle against corruption. It is also
vital to increase public awareness that curbing corruption in the DGT is not
somebody else‘s job, it is not only the DGT‘s job, and it is not only the job
of the Inspectorate General, the CEC/KPK or other oversight agencies. It is
everybody‘s job. This is a quite challenging thing considering the wide-
spread of corruption in the DGT. This is possible if we look at the progress
446 Limits of Good Governance in Developing Countries

of good governance practices in the DGT. When the number of proponents

grows bigger, certainly a well-governed DGT is possible.

4. THE RESISTANCE TO REFORM

The reform may help to improve public trust in the DGT. While the
results of internal and external survey, impressions of taxpayers and public
figures, including the elite group, were favorable, the success of this tax
administration reform will not only depend on the taxpayers‘ satisfaction but
also on the quality and motivation of staff, particularly staff assigned to the
modern office. Further efforts are needed to ensure that the governance
framework has a real impact on the behavior of tax officers not only in pilot
project offices but also in every office.
―Getting the policy change in place is one thing but getting them
implemented is another entirely,‖ said Stephen Parker of USAID to Prof.
Jeffrey Winters (Winters, 1996: 167). Parker‘s comments referred to the tax
officers‘ resistance to changes against the 1980s tax administration reform.
The 1980s‘ tax reform was mainly conceptualized by a team of foreign ex-
perts, with very minor involvement of the DGT officer. In other words, with
a very minimum participatory process, it is understandable that the DGT
fought the MOF at that time. Clearly, simplification of more than 48 diffe-
rent kinds of taxes into 3, and implementation of the self-assessment system
made the opportunity to corrupt decreased substantially.
Although at present, the DGT Tax Modernization Team plays the
main role in reforming the DGT, the major problem of implementing the
current reform lies in the resistance of corruptible tax officers and taxpayers.
This resistance apparently can be withdrawn from the general environment
of public services in the Indonesian society. The tax administration of any
country inevitably reflects to large extent, the nature of the country itself
(Bird on Gillis‘s Tax Reform in Developing Countries, 1989: 318). Also, the
current reform, similar to the previous ones, came from the top. The staffs,
who dealt with the business people to bring the tax revenue in, were not
consulted for the best and effective reform. This is similar to Parker had
described to Winters in 1980s.
To minimize the resistance to change, two aspects of the reform pro-
cess have played important roles. The first was the clear understanding of the
goal of the reform among officers and consistent synchronization between
concepts and implementation. Socialization and management by example are
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 447

the key factors for minimizing resistance to change by tax officers. A well-
managed communication program, therefore, is critical for a successful tax
reform in eradicating resistance to change. Some tax officers will need signi-
ficant training and assistance particularly in computer literacy. Not only will
the tax officers appreciate the value of inducting good governance practices
into the DGT, but they will also understand and appreciate the consistency
shown by top managers and in the end can emulate them.
As one of the modernization goals is to have high integrity and public
image, the resistance is not expected to cause any reversal in the broad
direction of the tax administration reform, although tax officer resistance
may lead to a variation in the pace and nature of specific tax administration
reforms. The motivation, confidence and pride of being a tax officer will
play an important role in increasing the trustworthiness of tax officers so that
the tax reform is a serious thing to consider. The high degree of continuity in
key personnel performance can also contribute.
Resistance to change took form in staff resigning from the DGT
service and moves out to work in private sectors. Special attention needs to
be given to tax audit activities as tax auditors have a strong sense of identity
and pride in belonging due to their highly specialized skill and knowledge in
technical aspects of taxation, accounting and audit, and a wide margin of
discretionary power they possess. In the past, tax officers indicated a pre-
ference for the audit area since this prestige derives from the greater expe-
rience and specialized technical knowledge required in this area and the
discretionary power. Still, most priority was given to money, since tax audit
was perceived as a lucrative job. Nevertheless, with this administration
reform, the gravity of tax audit might not be as strong as before. The training
and experience gained in the area of audit is very highly valued outside the
DGT, hence, there is a possibility that the best staff in audit will leave for the
private sector, which offers better remuneration and compensation for their
skill and knowledge.
The second aspect is beyond the DGT‘s capacity, i.e. the direction of
external reform. The DGT, at least, can cooperate under the parallel coordi-
nation or subordinated coordination by its superior. The DGT should not be
left alone in trying to address the corruption within the DGT. Basically, this
is a very multi-pronged effort, and every stakeholder is a partner in this
effort. Every organization and every party has an important role to play and
a systemic focus is critical.
It is common to have resistance to change from some people when a
new system incorporating good governance is implemented. However,
448 Limits of Good Governance in Developing Countries

greater concern is the probability of reform fatigue for tax officers. The
reform will lose its impetus if the reform continues without big changes in
poor governance practices. The resistance might also come from negligent
taxpayers who consider the benefit they can receive from the status quo in
which they can negotiate for lower taxes.
Some taxpayers may be resistant to change because of the benefits
received from the status quo in terms of bribery and collusion with tax
officer. The tax modernization will not mitigate this kind of problem without
full support from other related public agencies. Even the best system will not
able to maximize the DGT objectives of collecting government tax revenue
and promote taxpayer compliance with the tax law without stakeholders‘
participation. Corruption does not take place only in the DGT. Indonesia has
corruption everywhere. This is why it is so important that the DGT and other
public and private institutions cooperate.
Due to the reluctance from some parties, afraid of being hurt politi-
cally and economically, the reforms need time, resources, and consistent
long-term political support for effective and efficient tax administration.
This reluctance to collect taxes efficiently and effectively without fear or
favor is understandable in a country such as Indonesia, which has a fragile
political foundation.
However, there have been many taxpayers and tax officers who
already have ample experience in dealing with the modernization. They
understand completely the need to be fully integrated with the good gover-
nance practices as shown by the surveys. Out there, they live within a rigid
to change world. They have to contend with the resistance to change of
outside world, particularly in other public sectors. Future studies may shed
more light on the impact of resistance to change in tax administration
reform.

5. WERE THE OBJECTIVES ACHIEVED?

Reforming tax administration requires a better understanding of the

theoretical framework outlining efficient and effective tax and adminis-
tration not only based on the revenue adequacy principle. Recent governance
theories stress the importance of institutions that lead to accountability and
transparency in providing public services. Yet, evidence on the Indonesian
tax administration reform proves a lack of initiative in the specific context of
good governance, i.e. on equity, reflected in the inability to curb corrupt
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 449

activities and lack of fair law enforcement (including law enforcement to the
corrupt tax officers). In other words, the reform still focused on how to
increase the revenue in a short time rather than on long-term institutional
concerns such as anti-corruption efforts, regardless of the positive impro-
vement on taxpayer services and cost-effective administration in modern tax
offices. Although taxpayer surveys conducted by the AC-Nielsen and the
Hay Group have demonstrated a good achievement of the reform toward
good governance practices, graft practices still exist as can be seen on Gayus
Tambunan case, Bahasyim, and etc.

5.1 High Taxpayer Compliance

As Indonesia adopts self-assessment system, the primary responsi-
bility for the assessment process lies with the taxpayer rather than the DGT.
Taxpayers are expected to understand and comply with their tax obligations.
Under self-assessment system, some people may try to evade tax by not
registering, not filing the return, submitting false return, and not paying
taxes. Clearly, the study has shown that the DGT has failed in promoting
taxpayers compliance in national level, given the low number of registered
taxpayers, high number of stopfilers, substantial underreported tax due and
high tax delinquency.
Seen from the fact of high noncompliance, it is clear that there is
something wrong with the DGT‘s strategy in promoting tax compliance,
regardless of the sluggish growth of economy and the large size of under-
ground economy. The DGT can claim it has succeeded by showing the
evidence of compliance in LTO and MTO, but those taxpayers already had
been selected with certain criteria based on their tax potential.
The most basic factor in choosing to comply or not to comply is the
tax law. Logically, the more complex the tax laws are, or the more gray areas
there are, the more chance a taxpayer not to comply. The number of those
who chose not to comply also grows when tax law enforcement is perceived
as ineffective, implemented partially and unprofessional.

5.2 High Integrity

Did the reform have positive impact on good governance practices or
public image of the DGT? The answer is ―yes‖ , but to varying degrees up to
March 2010, the time when Gayus Tambunan and Bahasyim cases exploded.
450 Limits of Good Governance in Developing Countries

The on-going reform, including gradual modernization, platform for

strengthening monitoring and any noncompliance, streamlining tax proce-
dures, e-government, and good governance practices have been improving
the public trust, as shown by the favorable result of AC Nielsen‘s surveys.
This is coupled with the strong support provided to the DGT by the GOI.
It is true that the good governance practices accompanying the reform
helped the DGT minimize the chance to commit corruption in the modern
tax offices. However, this simultaneously also creates moral hazard and
opportunism that promotes tax corruption that lacks of monitoring sector
such as tax objection handling activities. Collusion between taxpayers and
tax officials continues as shown in Gayus Tambunan cases. Although the
DGT reported that 406 officers have been administratively sentenced
including 92 officers were heavily sentenced in 2008,19 the propensity for
misconduct continues to persist. There were still much unfavorable feedback
about the performance of the DGT, particularly concerning the corruption
practices and abuse of power.
Ironically in January 2009, President Yudhoyono just praised the DGT
reform which has attributed to the decreasing of Corruption Perception Index
2009 of Indonesia. But three months later the biggest scandal of tax corrup-
tion in Indonesia history exploded: Gayus Tambunan and Bahasyim cases.
The cases seriously have destructed the public image of the DGT and
staff. Indonesian people were shocked by the recent trial of Gayus
Tambunan, a former IIIa-rank tax employee. It revealed how the 31-year-old
Gayus conspired with tax evading companies to defraud the tax office as
much of tens of millions of dollars within less than three years under the
DGT modernization era.
Gayus was found in possession of Rp25 billion derived from tax
manipulation. His seven safe deposit boxes contains billion rupiahs were
found in different banks. The Gayus case has opened the alleged fraud
involving a number of tax officials, police officers, attorneys and lawyers.
Numerous suspicious transactions worth billions of rupiah through the bank
accounts of some tax officials, as discovered by the PPATK, have corrobo-
rated public perception that the DGT is a rotten organization.
Gayus got a lot of money from out of DGT‘s business process, and
that is in the appellate system. As he worked on taxpayer objections,
assessed their cases, which eventually went to the Tax Court. As a tax
objection officer, he had capability to utilize the information for providing
———————
19
DGT, 2009 Annual Report.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 451

consultation, which he was forbidden to do. And by help of Gayus, three

companies under Bakrie Group are suspected of committing tax fraud in the
amount of Rp2.1 trillion. Tycoon Aburizal Bakrie, the owner of the Bakrie
Group which is also Golkar Party Chairman, had repeatedly denied the
cases. If it is true, it would be the largest tax fraud in Indonesian history.
During the judicial process, Gayus illegally went out of detention to
Bali and abroad. He paid millions of rupiah to leave his cell at the Police
Mobile Brigade headquarters. He went in and out of jail at least 68 times
over four months. Later, Gayus‘ testimony in court has disclosed the
involvement of law enforcer such as police, attorney, lawyer, and judges: the
judicial mafia. In January 2011, Gayus was sentenced by the South Jakarta
District Court to seven years in prison for corruption. The case was earlier
stood trial at Tangerang District Court which set him free. Yet, the bigger
case with corruption, embezzlement, and money laundering are still in
investigation process by the police and the CEC/KPK.
In terms of the wealth generated from corruption, the Bahasyim case
was more shocking than Gayus.‘ Bahasyim was arrested by police, following
a report from the PPATK, which noted the extraordinary amount of money
flowing into his bank accounts. The former head of Jakarta Palmerah Tax
Office, who got promotion at the National Development Planning Board,
allegedly abused his positions at the DGT to gain profit for his own interest.
The strongest evidence is the Rp. 65 billion deposited in the accounts of his
family. Other evidences are the luxury houses and hectares of land he owns.
However, while Gayus admitted the money had come from taxpayers,
Bahasyim insisted that his assets were profits and interests from his business
activities.
Bahasyim was charged with violating the 2002 Money-Laundering
Law in conjunction with Law No. 25/2003 and violating the 2001 Anti-
corruption Law. Bahasyim was accused of violating Article 3: 1(a), which
prohibits the investment of assets that are known, or should have been
known, to be the proceeds of crime in a financial services provider, whether
in his or her own name or the name of some third party. Bahasyim was also
accused with violating article 11 which states that a civil servant or public
official who accepts a gift because of the authority vested in the civil servant
by virtue of his or her office shall be liable to a minimum prison term of one
year and a maximum of five years.
The cases certainly have destructed the image of the DGT in the eyes
of the public. Clearly, inefficient, incompetent, and corrupt tax apparatus are
a strong disincentive for potential taxpayers. Adopting good governance
452 Limits of Good Governance in Developing Countries

elements may minimize collusion and corruption. However, the main risk in
implementing this initiative is whether the DGT officers will take the
governance framework seriously and adjust their behavior, or simply ignore
it and continue their bad practices. The challenge is to construct a transparent
and accountable system that has two primary objectives: first, to prevent
fraud from taking place and, second, to inspire taxpayers‘ trust in a fair and
decent system in which there is a realistic chance for detecting fraud,
evasion, and corruption.
There are many very interesting initiatives in modernizing the DGT,
in line with the setting of the COC and new monitoring framework. The
DGT could have made more efforts towards accountability aspect as a very
fundamental one in implementing the initiatives. What I have learned is that
the DGT has now changed in doing business with the introduction of good
governance practices that will result higher tax revenue to the government.
Although some officers may still be involved in conducting corruption as
shown in Gayus Tambunan, the current tax administration reform must go
on and address the issue firmly and transparent. The cases are clear evidence
that the DGT needs more serious efforts in promoting good governance to
attain the status of a world-class tax administration. This is also the right
way for achieving the DGT‘s vision and mission, and also very important
way for attaining empowerment, transparency and accountability.

5.3 High Productivity

Since the launching of the reform, the DGT productivity has been
increasing, and even it was claimed that the first four years tax revenue
(2001-2004) in total exceeded the total tax revenue during the New Order.
However, the statement will mislead people without further analysis and
consideration on the political and economic factors. The fact is a radical
increase in tax revenue since the launching of the reform which is clear
evidence that effectiveness and efficiency has increased, at least in the large,
medium and 15 modernized small tax offices contributed in total almost 88%
of the total national tax revenue in 2006.
The important thing to note is that the higher productivity levels, even
with lower staffing resources, have been reached through continuous
improvements, training, e-government, and renovation of the DGT‘s work-
ing environment. Among the modernization initiatives, the DGT benefits
greatly from the modern tax office and e-government initiatives driven by
high productivity in IT.
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 453

A major concern observed in the DGT is the potential conflict

between short-term revenue collection objectives and strategic development
of mid-term modernization program. For long-term perspective, the DGT
initiatives must be seen in the light of the fact that tax revenue is expected to
be the backbone of the development budget, and not only to cover routine
budget. However, since Indonesia is desperately in need of improving
revenue performance and facing severe budgetary constraints, postponing
short-term gains is not an option for the GOI, the MOF and in the end the
DGT. Such gains are also important to earn political support for tax
administration reform. Therefore, in practice, the need to achieve the tax
revenue targeted by the GOI and other indicators stated by the DGT may
provoke abusive power of the DGT that in the end will destroy its image
with the general public.

6. CONCLUDING REMARKS

6.1 Concluding Comments

Similar to any other government organization, management of the
DGT is largely determined by laws, structures, procedures, technology and
human resources. The DGT operates within the country's current political
and administrative environment, and works within an organizational culture
that is the result of decades of relative neglect for institutional development.
The DGT does not operate in isolation from the rest of government and
therefore the tax administration reform is certainly impossible without the
support of other relevant public services. This is not an easy and simple task,
and cannot be realized in short period of time.
The improvement of tax administration requires the adoption of good
governance elements into every reform program. However, at macro level or
national level, the strong political resistance for the improvement of tax
administration would be hard to tackle without political will of the GOI. It
would also be difficult without people‘s support.
Indonesians must realize that the taxation problem is a national
problem. The management in the DGT will directly influence public life, and
the trust of the public towards the GOI. Tax policy requires consistency and
determination in implementation to encourage citizen, the taxpayer, but also
tax officer to comply. The current tax administration reform, in other ways,
will have a great impact not only on the Indonesian public administration
454 Limits of Good Governance in Developing Countries

services but also on private sector. The impact will be much more serious
than it ever has been in history, if the DGT can transform itself from one of
the most corrupted institutions into a well-governed one.
Combined strong management and political commitment are the two
single most important factors for strengthening tax administration. Since the
organizational structure must adequately serve the current needs of the
administration and function as an integral unit, the DGT has been moving
from type of tax organization towards functional organization. Experience
from the developed world suggests that as tax administrations gain strength,
they are better served by a mode of organization based on function (Tanzi,
1995). However, restructuring is a continuous event and, as economies
develop and as the DGT becomes more proficient, the structures may need to
be revisited.
Actually, the very nature of a tax administration can be managed by
means of simple measurement parameters such as tax revenue or tax ratio, as
they are determined by the GOI and approved by the legislature. However,
in the light of good governance practices, the question may be raised
whether the DGT has sufficient capacities to adapt the system to the whole
organization. In this regard, I would like to point out that the description of
the facts of good governance practices always shown to the public by the
DGT do not provide a description or assessment of the strategy documents,
but rather in effort to restore public trust in the DGT. This refers to the fact
that the DGT fulfills the objectives of the reform only in terms of tax
revenue but not in terms of tax compliance or tax officer integrity. There-
fore, conclusions on the success of the reform ought to be more nuanced to
indicate the capacities the DGT generated were not sufficient to accomplish
all objectives of the reform.
The achievement in terms of revenue target does not suggest that there
were no problems. In spite of the on-going encouraging progress, however,
the current tax ratio remains low by international standards. Although the
achievement is evidence that inefficiency and corruption have been reduced,
the tax administration still needs improvement since tax compliance is still
low and corruption still there.
The DGT, which is well known as one of the Indonesian institutions
with pervasive KKN, has been trying to curb them as part of tax adminis-
tration reform, in addition to efforts towards increasing taxpayer compliance
and its productivity. Among other good governance elements, the DGT has
paid serious attention to participation, transparency and accountability. It
needs a clear program and consistent public message to generate the neces-
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 455

sary capacities in promoting good governance. Therefore, it is necessary for

the DGT to generate more capacities that can lead to the adoption of good
governance practices in the whole organization as good governance practices
would not only raise tax administrative effectiveness and efficiency but
would also lead to restoring taxpayer confidence in the DGT.
The relationship between tax administration reform and good gover-
nance practices is multifaceted. Nevertheless, the modernization has been
carrying out to reduce the opportunity of red tape practice and corruption.
Leaving aside the even more complex relationship between constrains and
encouragements in achieving the objectives of modernization, I simply note
the existence of these constraints in the DGT in reducing corruptible officers
who do not dare to do tax negotiation openly and collectively particularly in
non modern tax offices. Indeed, there is reason for optimism. While fighting
corruption is difficult, a dramatic internal change is taking place. It would
make sense also for the DGT to involve the national anti-corruption move-
ment and begin to take affirmative action in curbing corruption within the
DGT first.
In sum, the DGT believes in reforming institutions and thereby
changing incentives and implementing good governance practices. This is
the real key to tackling corruption. The DGT‘s focus on governance, on
empowerment, transparency and accountability has had increased signifi-
cance in the past five years. In my opinion, the DGT is truly a very different
place than it was ten years ago.
It will take time for the DGT to catch up the level of tax collection or
the tax ratio accomplished by neighboring countries such as Thailand and
Malaysia. In addition to the internal factors mentioned above, the level of tax
collection also depends on external environment such as politics and eco-
nomy. However, if the DGT can consistently implement the current reform,
particularly in good governance practices, any changes, either in internal or
external factors, can be treated more as opportunities than threats.
Based on the research findings, I came to a conclusion that creating
tax officer compliance, honest officers through the presence of reward and
punishment system, a merit based system and performance based mana-
gement with support of good governance practices, can be more effective to
increase taxpayer compliance than to put the burden to comply only on
taxpayers. For example, giving appropriate compensation to those officers to
enhance their compliance to the tax laws and regulation can also enhance
taxpayer compliance. In other words, high taxpayer compliance should be
enhanced by tax officer compliance. If positive rewards increase honest
456 Limits of Good Governance in Developing Countries

responses of tax officer, this scheme can create a critical mass of people who
comply. This attitude will encourage respect for the tax law which can be
expanded to other laws. Thus, tax compliance can increase compliance in
other areas of society as well. The DGT can be pioneer for implementation
of good governance practices.
Billions of rupiah may be spent on the reform and the best systems
may be introduced, but ultimately it is the people in the organization that
matter. Successful tax administration requires not only balancing the
services to the taxpayer and the enforcement of tax laws and regulations to
promote voluntary compliance. It also involves the integrity of officers in
implementing reform program, particularly those having the elements of
good governance.
Nevertheless, it would be appropriate to say that currently, the DGT is
a public agency already driven by the new paradigm. Tax officials are
encouraged to emulate private sector ways of doing business. What might be
seen as misconduct in the tax offices could be viewed as initiative in the
private sector. Still, much is left to be done by the DGT in fighting corrup-
tion. Corruption is a complex and pervasive phenomenon in Indonesia and
has reduced Indonesian people‘s confidence in the DGT and it is not that
easy to gain people‘s trust in a short period of time.

6.2 Future Challenge

In response to the future challenge, the DGT must have compre-
hensive communication policies that are well focused both on short and long
term public relations. The DGT must also improve bottom-up feedback
mechanism so that it can encourage the implementation of modernization
program by creation of strong networking and the maintenance of officers‘
motivation.
It will be a long and hard journey for the DGT to become a big,
honored, and respectful institution. It requires the spirit, integrity, consis-
tency, hard work, and appropriate strategy. The result achieved,
appreciation, and critic should encourage the spirit and creativity of tax
officer to give the best performance for the DGT. The vision must be
conveyed well to all officers. This is not easy because the DGT officer is not
accustomed to be pro-active as most policies generated are usually
instructional, top down and ad hoc.
Concerning internal support, the improvement of officer‘s capacity
requires special attention. In order to change the paradigm, it requires sharp,
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 457

focus, and appropriate strategies. Due to limitation in human resources, the

DGT needs appropriate strategy so that the existing momentum can stimu-
late the policy for human resource development. This is appropriate for the
development of good governance in the DGT. In addition to the capacity in
creating the strategic plan or action plan, its administrative policy must be
supported by tax administration processes that assure the clarity of tasks,
responsibility and working framework.
The DGT should keep seeking adequate methods for curbing the
corruption within the DGT. In addition to the restructuring of the tax system,
the GOI must develop anti-corruption measures in the DGT and implement
them impartially. That is how the GOI can destroy the machinery of the
corruption.
However, it takes a great deal of time for implementing good gover-
nance practices. The institutionalization of such governance elements must
take root and be sustained over time before its impact can be assessed. It is
not realistic to accomplish the DGT‘s ambitious goals to curb widespread
corruption in a short period of time. The DGT is attempting to address this
issue in the context of a weak political regime, a difficult economy, rising
sectarian and communal violence, erosion of central authority, and greater
demands from regions for political autonomy or even secession. Further-
more, if the reforms, particularly good governance practices are intended to
be more than cosmetic, the involvement of civil society will need to be more
developed in monitoring the operation of the DGT that is congruent with the
definitions and concepts identified as ‗participatory development. An em-
phasis on governance, in effect, demands a complete overhaul of the whole
approach to public policy formulation, social organization, and requires
radically new approaches to development policy.
Finally, in a positive light, the existing external constraints lie in the
general characteristic of the Indonesian public service. This gives the DGT a
unique advantage as a pioneer to implement good governance practices, and
become an island of integrity in the ocean of corruption. However, as the
strategic vision of the DGT cannot be independent from Indonesia‘s general
public service capacity and actual political system, merely reforming the
DGT would be insufficient. More basic reforms are needed to ensure that
other related institutions in society can also realize their potentials and
function accordingly. It is possible to create a clean and sound DGT if other
institutions were not intertwined in a complicated chain. Therefore, the DGT
reform must be accompanied by reforms of other public agencies. The
reforms can be made gradually at the most appropriate time, but most
458 Limits of Good Governance in Developing Countries

important is the commitment and political will to initiate them and the
continued and determined effort to implement them consistently, so that
good governance matters.

LIST OF ABBREVIATIONS

AR : Account Representative
CEC/KPK : Corruption Eradication Commission (Komisi Pemberan-
tasan Korupsi)
CIDA : Canadian International Development Agency
COC : Code of Conduct
DG : The Director General
DGT : Directorate General of Taxation
DTI : Directorate of Tax Information
E-government : Electronic Government
FY : Fiscal Year
GDP : Gross Domestic Product
GOI : The Government of Indonesia
IG : Inspectorate General of Ministry of Finance
IT : Information Technology
JICA : Japan International Cooperation Agency
KKN : Korupsi, Kolusi dan Nepotisme (Corruption, Collusion
and Nepotism)
KUP : Law on General Rules and Procedures for Taxation
LTO : Large Taxpayer Office
MOF : Ministry of Finance
MTO : Medium Taxpayer Office
STO : Small Taxpayer Office
TAMF : Technical Assistance Management Facilities
TIN : Taxpayer Identification Number
USAID : US Agency for International Development
VAT : Value Added Tax
www : world wide web
Lessons from Indonesian Tax Administration Reform Phase 1 (2001–2008) 459

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