Evaluating the Tax Compliance Costs of Small and Medium Enterprises Operated by Individuals under Alternative Enterprise Tax Regimes in Indonesia

Abstract

This study investigates the tax compliance costs of small and medium enterprises operated by individuals (individual SMEs) in Indonesia. It estimates and compares these costs under two different tax regimes operated in Indonesia: a presumptive tax regime that applies a single, final tax rate on annual turnover; and the regime that applies a more conventional, progressive tax rate schedule on calculated taxable income. The estimation and comparison involve all components of tax compliance costs, including explicit, implicit, and psychological costs.

The research is motivated by two main considerations. First, it focuses on individual SMEs because personal income taxpayers are by far the largest group of all taxpayers in Indonesia (91 per cent in 2018; see (DGT, 2019a)) and the contribution of SMEs is significant for Indonesia’s Gross Domestic Product (63 per cent in 2018; see (Indonesia, 2019)). Secondly, despite their obvious importance, and despite significant research that has been conducted in many parts of the world (Alm, 2019, p. 32), the issue of tax compliance costs borne by individual SMEs in Indonesia has remained a relatively unexplored topic. Moreover, research into the psychological costs of tax compliance and research comparing the compliance costs of two different tax regimes in the same tax system has in each case been particularly limited. Thus, this study proposes a systematic analysis to address a series of research questions related to these under-explored areas relating to the tax compliance costs of individual SMEs in Indonesia.

By applying a mixed-modes research method, the study not only reveals the average costs to comply for each taxpayer under different tax regimes, but also identifies the significance of the total costs and the potential drivers of those costs. In addition, further analysis provides a novel understanding of aspects of tax compliance costs by showing how the components of the costs interact with each other. Finally, the findings may be useful for policymakers in Indonesia given that the presumptive tax regime will cease to exist in 2025.