INDONESIAN government is faced with the challenge of increasing revenue without burdening the middle class. A potential solution lies in tapping into the underground economy, which could generate an additional IDR 135 trillion in tax revenue.
This approach is more prudent than raising taxes, which could further weaken the purchasing power of the middle class and hinder economic growth.
The underground economy refers to economic activities that are not transparent, lack oversight, and evade taxation. These activities include companies manipulating their financial reports to obtain tax incentives, as well as unreported transactions in industries such as mining, palm oil, and nickel processing.
By bringing these activities into the formal economy, the government can tap into a significant source of revenue and promote more equitable economic growth.
Tax revenue from underground economy that really matters
The potential tax revenue from the underground economy is substantial. The government could optimize tax collection from natural resource processing, such as coal production, which is estimated to generate IDR 66.5 trillion in tax revenue.
Additionally, taxing the loss of biodiversity due to natural resource extraction could yield IDR48.6 trillion. These figures highlight the significant potential for increased revenue through effective taxation of the underground economy.
But, there challenges to overcome. The government needs to improve its oversight and transparency in managing natural resources to optimize tax collection.
Furthermore, discrepancies in export and import data between Indonesia and its trading partners suggest that there may be significant tax evasion occurring through miss invoicing, under invoicing, or document manipulation.
To address these challenges, the government must strengthen its regulatory framework and enforcement mechanisms.
Tax evasion
The Corruption Eradication Commission (KPK) has previously uncovered evidence of tax evasion in the nickel industry, with an estimated loss of IDR 575 billion to the state. This highlights the need for stronger enforcement and regulation to prevent such practices.
By tackling tax evasion and promoting transparency, the government can ensure that the benefits of economic growth are shared more widely among its citizens.
Taxing the underground economy offers a promising solution for increasing government revenue without burdening the middle class. By improving oversight, transparency, and regulation, the government can tap into this significant source of revenue and promote more equitable economic growth.
With careful implementation, this approach can help Indonesia achieve its development goals, reduce poverty and inequality, and ensure that the benefits of economic growth are shared more widely among its citizens.
The successful implementation of this approach will require a coordinated effort from various government agencies, including the Ministry of Finance, the Ministry of Energy and Mineral Resources, and the Corruption Eradication Commission.
