TAXATION: AN INTRODUCTION Eko Suwardi, Ph.D, M.ScFaculty of Economics and Business Universitas Gadjah Mada

What is TaxPayments from tax payers to the stateBased on the Tax LawEnforceableWithout direct compensationsTo finance state budget

The Function of taxesBudgetary To finance state expenditures

RegulationGovernment policies in social and economy.

The Phylosophy of taxEquityLawfulEconomicalFinancialSimple tax systemConvenience of payment

EquityEquity in tax law: All people and organization who earn above taxable income are taxpayers. Tax payment based on the income earned in a particular year. All other actions that are subject to be taxed have to pay taxes. Equity in tax implementationTax payers have rights to install, postpone or complain on their tax payment.

LawfulTax Laws provide legal bases for taxes in every country.Tax Laws provide a certainty of payments that must be made by taxpayersTax Laws are enforceableTax Laws protect the rights of taxpayers and government.

EconomicTaxes are not intended to distort economy and trades.

Taxes are designated to allocate resources to strategic sectors.

Taxes are intended to maintain economic growth

FinancialTax revenue must be greater than the costs of tax collection.

Early tax collection is always better than the late one (time value of money)

Convenience of paymentsEasier for taxpayers to pay their taxesSimplicity in calculating tax payableProviding free tax assistancesEstablishing LTO, MTO to improve DOTs services for taxpayers.Encouraging the willingness of taxpayers to pay by reducing interface.

Taxation theoriesInsurance theoryInterest theoryCapability theoryDevotion theoryPurchasing power theory

Insurance Theory

The state protect the life, wealth and the rights of its citizens. Therefore, the citizens have to pay taxes to the state.

The Interest TheoryTaxes are paid based on how much interest of the persons to the state. The more a person needs the state to serve the more taxes that person has to pay

Ability TheoryTaxes are paid based upon the capability of a person to pay the taxes. The capability is measured by his or her income to fulfill his or her basic needs.

ObjectivityBased on incomeSubjectivityBased on the minimum basic needs

Devotion Theory

The citizens have to be devoted to their country. Thus, its is part of citizens obedience.

The Purchasing Power theoryTaxes absorb the wealth of society and transfer it to the state budget.

In turn, the state spends its budget to finance its expenditure and investment.

The Systems of TaxOfficial Assessment SystemSelf Assessment SystemWith Holding System

Official Assessment SystemTax office (TO) decides the tax that has to be paid by tax payer.TO is active whilst taxpayers are passive;Tax becomes payable when the taxpayers receive the letter of definitive tax decision.

Self Assessment SystemTaxpayers have the rights to calculate their own tax burdenTaxpayers are activeTO monitors and superviseTO serves taxpayers.

With Holding SystemThird parties (TP) have responsibility to take taxes from taxpayersTPs have responsibility to pay and repot the taken taxes to the stateThis system speedup tax payments

Tax rates

Proportional tax rateFixed rateProgressive rateDegressive

Proportional RateFixed percentageProportional to the number of taxable objects.

Fixed rateTaxes are in a fixed amountExample: contract tax

Progressive RatePercentage greater in line with the bigger in taxable objects.Variance:Progressive-progressiveIncreasing incremental rate Fixed progressiveFixed incremental rateProgressive digressiveDecreasing incremental

Digressive rate

Decreasing percentage of tax rateThe bigger taxable object, the less percentage of the rate.

The Philosophy of TaxTax is a social phenomenaThe existence of taxes is in the society Taxes are the debt of members of society to the societyTherefore, taxes have to be based on the tax rule.

The Philosophy of tax ruleTax is the debt of citizens, therefore tax is also a contractIt needs to be regulated concerning: when tax becomes payable, payment, expiration period, preference, enforcement, taking covenant, tax court, and tax avoidance and evasion.

Why tax law?

Taxation without representation is robberyNo taxation without representation.

PancasilaKetuhanan Yang Maha EsaKemanusiaan Yang Adil dan BeradapPersatuan IndonesiaKerakyatan yang dipimpin oleh hikmat kebijaksanaan dalam permusyawaratan/perwakilanKeadilan Sosial bagi seluruh rakyat indonesia.

Believe in GodTaxes do not depart from any religion Religion tells us to help other peoplesThe social welfare becomes our responsibility

Humanity

Taxation has to respect to humanityTaxation is part of our government effort to increase welfare

Indonesian UnityTax creates social solidarityHelping one to anotherThe benefits of tax are equally distributed to the societyThus, increasing the awareness of Indonesians to be unite

DemocracyTax laws are resulted from agreement among the related partyThe implementation must be backup by wisdomTax becomes a contract between society and the government

Social justiceTax has to be used for public welfareImproving public facility to reduce the gap between the have and the have not.Eradicating poor people and street children.Improving education

Adam Smiths Tax PrinciplesEquality and equityCertaintyConvenience of paymentEconomic of collection

Tax classification Direct vs Indirect taxes Subjective vs. objective taxes Central Government vs. Local taxes

Direct Tax in IndonesiaTaxes that are taken directly from intended taxpayers (not through third parties)

Examples: Income tax, Fiscal tax, Property tax, vehicle tax.

Indirect Tax in IndonesiaTaxes that are taken indirectly from taxpayers; that is through third parties (with holding tax)

Examples: Value added tax (GST), income tax article 21, import tax.

Subjective Tax in IndonesiaTax that is applied to taxpayers with respect to the subjective condition of taxpayers.

Example: Income tax

Objective Tax in IndonesiaTax that is applied to taxpayers regardless the subjective condition of taxpayers

Examples: VAT (GST), Fiscal tax, Final income tax.

Tax Laws IndonesiaPancasila as state philosophy and resource of state laws.Introduction and article 23 of UUD45Tax regulations (laws)Presidential decree in taxationMinisterial decree or DGOTRegional tax rules for regional tax. (Perda)

The Classification of tax lawsMaterial Tax LawsFormal Tax LawsCooperation with taxpayersCooperation with third partiesThe Secrecy of fund in Bank and Tax

Who are Taxpayers?

Residential tax baseSource of income tax baseNationality base

Tax law interpretationsGrammatical interpretationHistorical interpretationSystematic interpretationSociological interpretationInterpretation based on analogyLegal formal interpretaion

When tax payable emerges?SubstanceWhen taatbestandFormalWhen TO concluded the tax payable

The Role of third partiesIncrease the probability of tax collectionSometimes taxpayers are unidentifiedHelping taxpayers in fulfilling their responsibility by taking out tax from taxpayers income.

Tax collection

Tax collection based on actual tax objectTax collection based on expected or predicted tax objectTax collection based on both actual and predicted tax objects

When tax payable is upHas been paidCompensationTax amnestyExpired

Types of TaxesIncome taxValue added tax (GST)Property taxLegalization taxLocal tax,Property acquisition tax

Income TaxTaxpayersTax objectTax object exceptionExpensesTaxable incomeNon taxable incomeTax rate

TaxpayersWho are they: Individual; Un-owned wealthOrganization; Permanent Establishment.

Income Tax ObjectsTax object is any increasing income which is obtained by taxpayers either from overseas or domestic that can be consumed or added to their wealth in any name or form.