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Where has the money gone?: The case of Value Added Tax revenue performance in Indonesia

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  • Iswahyudi, Heru
Abstract
Since its introduction in 1983, Value Added Tax (VAT) has played an increasingly important role as one of the major sources of revenue for the Indonesian government. In the last two and a half decades, however, there is declining trend in its collection performance as a percentage of Gross Domestic Product. This study aims to explore the determinants of this declining trend in VAT revenue using macroeconomic data. These determinants are decomposed into three broad categories: tax expenditure policy, taxpayers’ noncompliance, and the share of aggregate consumption in the economy. It finds that the performance of VAT collection could mainly be explained by tax expenditure policies and the extent of noncompliance with tax laws. It is proposed that avenues of approach for reform could be directed toward reducing the scope of VAT exemptions, establishing a systematic approach in data collection and analysis to closely monitor trends and changes in taxpayers’ behavior, simplifying the tax system by setting a single rate that is imposed on a single type of consumption tax, and improving audit effectiveness by building trust between tax authority and taxpayers.

Suggested Citation

  • Iswahyudi, Heru, 2018. "Where has the money gone?: The case of Value Added Tax revenue performance in Indonesia," MPRA Paper 89876, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89876
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    File URL: https://mpra.ub.uni-muenchen.de/89876/1/MPRA_paper_89876.pdf
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    1. James Alm, 2019. "Can Indonesia Reform Its Tax System? Problems And Options," Working Papers 1906, Tulane University, Department of Economics.

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    More about this item

    Keywords

    Indonesia; Value Added Tax; Tax Expenditure; Tax Revenue; Tax Noncompliance;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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