Does Tax Simplification Motivate Small Businesses to Be More Compliant? Evidence from a Regression Discontinuity in Indonesia

Abstract

This research investigates how the tax simplification program in Indonesia affects tax compliance among small businesses. This study employs a regression discontinuity design and examines various parameters of tax compliance. The results indicate that tax simplification does not significantly influence tax payment behaviour. However, it does have a positive effect on overall tax compliance, as evidenced by increased reporting frequency and decreased penalties. Investigation of the heterogeneous treatment impact reveals a considerable variation in treatment effects across geographic areas and internet accessibility. Taxpayers located in areas with decent internet connectivity and proximity to the tax office appear to benefit more from the program's implementation.

Keywords:

• tax simplification
• compliance
• avoidance
• regression discontinuity

JEL Classifications:

• H21
• H24
• H26

Disclaimer

As a service to authors and researchers we are providing this version of an accepted manuscript (AM). Copyediting, typesetting, and review of the resulting proofs will be undertaken on this manuscript before final publication of the Version of Record (VoR). During production and pre-press, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal relate to these versions also.

ACKNOWLEDGEMENT

We thank Mathias Sinning, Sarah Dong, Robert Sparrow, Miguel Olivo-Villabrille, Blane Lewis, Hieu Nguyen, Russel Toth, Uwe Dulleck, Dainn Wie, Christopher Hoy, Nurina Merdikawati and Sulistiyo Ardiyono for helpful comments. We gratefully acknowledge financial support from the Indonesia Endowment Fund for Education (LPDP). The opinions presented in this document belong to the authors and may not necessarily represent the stance of the Indonesian Government.

Notes

1 According to ADB (2020), the economic contribution of SMEs in Indonesia during 2019 is estimated at IDR 8.573.895 Billion and grows at 9.6 percent annually. In terms of the number of entities, according to Statistics Indonesia (BPS), the total number of micro, small and medium enterprises (MSMEs) is estimated at 62,9 million entities, which equals 98 percent of the total number of businesses in Indonesia.

2 This view is also relevant to the social-psychology approach, as emphasised by Alm (2019).

3 GR-23/2018 concerning Income Tax on Operating Income Received or Acquired by Taxpayers with Certain Gross Turnover was issued on June 8, 2018, and revoked the previous GR-46/2014.

4 This qualification seems to be more relevant because of the utilisation of turnover rather than asset as the measurement criteria. Following Freedman & Crawford (2010), using the size of the assets might be inaccurate because it does not directly relate to actual small business characteristics.

5 Tax compliance and long-run revenue are two main components of DGT's medium-term strategic plan, as depicted in the Strategic Plan document 2018-2020.

6 According to this program, there will be 132 services digitised from 2019 to 2024, which consist of 59 automated services, 50 services with the support of a contact centre, and 32 services that use the tax office's support services.

7 By regulation, non-timely reporting brings consequences of penalties, including administrative fines of IDR1.000.000 for corporations and IDR100.000 for individuals if tax returns are not submitted within the timeframe or the deadline for extending the submission of tax returns.

8 By rule, underreporting brings consequences of both administrative and more serious enforcement, including audits, active tax collection, coercions, confiscations, auctions, and criminal sanctions.

9 The process of gathering data must follow strict guidelines for ensuring the confidentiality and anonymity of the collected information.

10 This project received human ethical approval from the Asia Pacific & Business Delegated Ethics Review Committee – Australian National University (Protocol: 2021/508) and institutional approval, as mentioned earlier.

11 As indicated earlier, the GR-23/2018 enables small businesses with an annual turnover of no more than IDR4.8 billion to join the simplification program.

12 For instance, Goldberger (1972) suggested that RD might have a lower efficiency at about 2.75. Therefore, RD requires more cases.