Preventing the Poor Getting Poorer

Taxes collected from the public are the main source of income for various countries in the world. The money is then used to finance the government's operations and improve the welfare of its people. Supposedly, tax collection does not make the poor poorer. However, what happens can be the opposite. Bachas (2023) explains that the poorest households in the world, which should need a lot of assistance, instead contribute to the government instead of receiving government assistance.

In Indonesia, the problem of tax collection which is a burden for the poor is anticipated by the government by providing various tax exemption policies and facilities. With these policies, taxes paid by the poor can be minimized. Even so, it will be difficult to eliminate the taxes paid by the poor because there are consumer goods that are still subject to VAT.

For MSMEs that have a turnover of up to Rp4.8 billion per year, income tax is only 0.5% of the turnover. This figure is relatively small compared to paying taxes using the normal scheme. These business actors are also exempt from the obligation to collect VAT so that they can reduce business expenses and administrative complications.

After receiving income, people will spend their income to consume goods and services to meet their daily needs. VAT will be charged at the time of purchase of these goods and services. Due to the non-discriminatory nature of tax subjects, VAT can have a bigger impact on the poor than income tax.

To reduce the negative impact on the poor, the government excludes the imposition of VAT on several goods that are urgently needed by people. Staple goods such as rice, wheat, vegetables, chicken, meat and eggs are exempt from VAT.

BPS Susenas data on September 2022 shows that 63.65% of the expenditure of the first quintile households (the lowest expenditure) is spent on buying food, with 19.5% of it being spent on buying rice, 9.78% for buying vegetables, and 47.35% other food ingredients. With the exception of VAT, those households do not need to pay VAT on these basic necessities.

However, 10.51% of the food expenditure above is cigarette and tobacco spending for which VAT is not exempt, and is even subject to additional excise. One of these expenses causes the poor to still have to pay taxes.

The government also provides VAT exemptions for medical health services so that the poor are not increasingly burdened with VAT when they are sick. Income from health insurance provided by BPJS is also not subject to income tax.

Not only the main goods and services above, the government provides VAT exemption for housing needs for the poor. The government exempts VAT on the rent of simple flats, simple and very simple houses. This type of house is the type of house that is mostly occupied by the poor. Electricity with power below 6600 watts and clean water also get VAT exemption so that it can maintain consumption from the poor.

In an effort to educate the nation's life, the government excludes VAT from education services. The poor can access education at minimal cost without being subject to VAT. The purchase of textbooks is also exempt from VAT.

However, the VAT exemption for materials needed for the poor should still be expanded. Wicaksono et al. (2020) show that in 2018, the richest households in Indonesia bear approximately 4% of their expenses to pay VAT, while the poorest households bear approximately 3%, only a difference of 1%. This shows that currently, the VAT burden for the poor and the rich is not much different.

Tax Expenditure

Implementation of tax policies that prevent the poor from getting poorer because of tax has an impact on tax revenues. The measurement of estimated lost taxes as a result of the policies implemented by the government is presented by the government in the form of tax expenditure.

Tax expenditure is measured using the revenue forgone method. This method calculates the difference in tax revenue due to provisions on tax expenditure, assuming there is no change in behaviour from taxpayers and other tax revenues.

By using the tax expenditure reports, estimates of lost tax revenue due to tax policies for the poor can be identified. The final income tax for MSMEs is estimated to cost the state Rp18.29 T in 2021. The largest tax expenditure arises from VAT policies that are not required to be collected by entrepreneurs with a turnover of no more than Rp4.8 billion, which is Rp46.6 trillion.

To maintain the price of basic necessities with the exception of VAT, the potential for lost revenue reaches Rp33.09 T. The VAT exemptions for health services and education services provide a potential loss of Rp3.3 T and Rp 17.5 T respectively. For exemption from the imposition of VAT on water, the government expenditure is Rp1.09 T. Meanwhile, for the exemption from the imposition of VAT for electricity, the expenditure is Rp6.3 T. 

In total, the total government tax expenditure for this tax policy reaches Rp 126.98 T or almost 10% of total tax revenues in 2021. If this is proportional to the number of poor people at 9.7% in September 2021, tax expenditure for the poor will reach Rp12.32 T.

By using the tax expenditure approach, it can be seen that the government is very concerned about the impact of imposing taxes on the poor. The government provides many tax exemptions and facilities to improve the welfare of the poor. Even so, the provision of tax policies for the poor needs to be further improved so that the VAT burden gap between the poor and the rich is not too narrow.