The Role of Tax in COVID-19 Response in Indonesia

"The Role of Tax in COVID-19 Response in Indonesia: The Principles of Flexibility, Solidarity, and Transparency"

As with other countries across the world, Indonesia is grappling with the rapid spread of the corona-virus. As of October 16, 2020 Indonesia currently has the highest COVID-19 fatalities in Southeast Asia. The number of cases has been skyrocketing since March, when the first two cases were reported. Indonesia has reached 353,461 confirmed cases of COVID-19 and 12,347 deaths as of October 16, 2020 making it the highest in Southeast Asia. This unprecedented situation threatens to devastate economies and financial stability in Indonesia, with a significant hit on small and medium- sized enterprises (SMEs), business, and financial sectors. This global turmoil and rapidly changing circumstances prompt us to evaluate the fiscal and tax policy to stabilize the national economy, particularly on how tax policy can aid governments in responding to the COVID-19 crisis through the principles of flexibility, solidarity, and transparency. 

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

Flexibility as a fundamental principle of tax should be argued in the role of tax in the economic policy  response  of  COVID-19 in Indonesia. Flexibility  refers to the notion that tax systems should be flexible and dynamic enough to meet the current revenue needs of governments while adapting to fluctuating needs on an ongoing basis. This means that the structural features of the system should be  durable  in  a  changing  policy context, yet flexible and dynamic enough to allow governments to respond to the current circumstances. Other than adaptability to different circumstances, flexibility should also consider solidarity. Leon Duguit, a French public law scholar, posited that solidarity is the source of legal obligation. This notion of solidarity can be divided into a sense of social necessity (sentiment de la socialite) and a sense of justice (sentiment de la justice). 

The sense of social necessity refers to a collective action to accomplish a common or societal interest, while the sense of justice refers to the appropriate distribution of tax burdens. In this case, the state budget has been revised twice through Presidential Regulation No. 72 of 2020, which amended Presidential Regulation No. 54 of 2020, to regulate an increase in state spending and a widening state budget deficit to sustain the effort against  the  pandemic.  The 2020 state budget deficit is now expected to reach Rp 1.03 quadrillion (US$73.4 billion) or 6.34% of gross domestic product (GDP). The principle of flexibility is also reflected in the decrease of the state income, which is projected to reach Rp 1.69 quadrillion, a decrease of Rp 60.9 trillion from the government's earlier projection, with Rp 1.4 quadrillion projected revenue from tax due to lower tax collection.

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

Lastly, transparency should also be imperative to tax policy. As the government received international financial support, debt relief, and generated additional funding, they should be able to provide transparent monitoring and reporting of domestic revenues, aid, and spending. The government must also demand transparency from pharmaceutical corporations on licensing deals, trial data, and vaccine distribution. The vaccine development is funded through taxpayer money and therefore requires recognition in developing a system that allows for equitable distribution in the public domain. This is essential to build trust as the public needs to be informed on how funding has been allocated pro portionally to the economic and health system recovery. Increased trust and accountability can also improve tax morale and voluntary tax compliance. This is important in the long run to strengthen tax capacity building to mobilize revenues in the repercussion of the crisis. In this case, taxes will play a role in shaping the "new normal" through reevaluating current tax policy as the critical building block for increased domestic resources, sustainable development  and  for  promoting  self reliance, good governance, growth, and stability in the time of the pandemic.

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