Causes and consequences of corruption in tax administration: An Indonesian case study

Abstract

No society is immune from corruption, and within any society taxation plays a pivotal role in relation to such activity – which can be both positive and negative. Positively the tax system can provide the kind of regulatory framework and institutional foundations which can help to eradicate or constrain corrupt practices. On the negative side, corruption reduces tax compliance. Even perceptions of corruption, whether “grand” or “petty”, seriously undermine taxpayers’ intention to report actual income. The relationship between tax and corruption is complex and it is also critical, and nowhere is this more the case than in the role a revenue authority plays in its administration of the tax system. This paper uses an Indonesian case study as a framework to explore critical issues in this relationship between tax and corruption. More particularly, it considers the causes and impact of corruption at tax administrative levels in Indonesia, and identifies and evaluates strategies the Indonesian revenue authority (the Directorate General of Taxation, or DGT) has adopted, or can adopt, to ensure opportunities for such corrupt activity are mitigated or eliminated. This is done in the context of an evaluation of a major tax office corruption scandal that has occurred in recent years in Indonesia: the Gayus case. The paper adopts a qualitative approach, utilising archival analysis supplemented with interviews and correspondence with key players involved. After an introduction, the paper identifies (in Section 2) the principles that typically underpin anti-corruption strategies in revenue authorities in developing countries, together with examples of some of the anti-corruption strategies employed. It then considers (in Section 3) the nature of the corrupt activity exemplified by the Gayus case in Indonesia, how it arose, and how it came to light. This is followed (in Section 4) by a consideration of the impact upon the organisation, how the DGT dealt with it and what changes came about as a result in terms of anti-corruption strategies subsequently adopted and now operating in the DGT. The paper concludes (Section 5) with a section on the lessons learned and prospects for the future, both in Indonesia and elsewhere.