MPFD Policy Briefs No.31, January 2016 "Improving tax policy and administration in South-East Asia"

MPFD Policy Briefs No.31, January 2016 "Improving tax policy and administration in South-East Asia"

Wednesday, January 13, 2016
Public information and advocacy materials

An important function of the government is to collect taxes for the provision of public goods. While a number of South-East Asian economies, such as Indonesia and the Philippines, have relatively low tax revenues as a share of GDP, there is renewed public interest in strengthening tax revenues for better education, healthcare and infrastructure, especially in the context of the recently adopted 2030 Agenda for Sustainable Development. This policy brief discusses how improvements in tax policy and administration could help raise adequate revenues and provides illustrative estimates of ‘potential’ tax revenues.

Total tax revenues in South-East Asian economies as a share of GDP ranged between 12.4 percent in Indonesia and 14.1 percent in Thailand in 2013 (figure 1). While the ‘optimal’ tax-GDP ratio would depend on a number of factors – such as a country’s preference for public goods, the availability of non-tax revenues, and the structural characteristics of the economy – by all accounts, there seems to be room for increasing tax revenues. For instance, ESCAP (2014) found that Indonesia’s ‘potential’ tax-GDP ratio is approximately 4 to 5 percentage points higher than the actual level.

Tax reforms can be challenging and the outcomes sometimes disappointing, as they require institutional capacity strengthening and effective governance, which cannot be achieved overnight. Setting medium-term strategies and targets are therefore recommended. Political leadership is critical. To ensure that tax policy and administration are properly aligned, the governments could focus more on improving coordination among finance ministry, board of investment and other bodies that grant tax incentives, regional and local governments, and the revenue administration. To narrow ‘policy gaps’, a recommendation highly relevant but not limited to the CIT is that governments publish tax expenditures as part of their national budget reporting.


MPFD Policy Briefs No.31-SEADownload