A Fair Tax Scheme For Thriving Entrepreneurship

By: Erikson Wijaya, the Directorate General of Taxes officer

A robust business environment will only come with solid entrepreneurship among the people. As signified by trading activities, business is a tool entrepreneurs use to play their role. They may commodify goods and services to fulfil society’s needs and give them some money. In The Wealth of Nations (1776), the Scottish economist Adam Smith asserts that the role of entrepreneurs is to serve as intermediaries between other factors of production; entrepreneurs are thus proprietary capitalists whose activities can fuel the division of labour by spending their capital and income from sales. However, entrepreneurs require prerequisites to sustain, and tax is much considered. This article suggests that a favourable tax regime must be provided to encourage the sustainability of entrepreneurship. We can elaborate more on what conditions and methods to apply to build a fair scheme of tax burden to businesses.

When we discuss entrepreneurship, it is proxied to small and medium enterprises (SMEs). The presence of SMEs enables job creation, mitigates scarcity, and reduces social vices. Muritala et al. (2012) opined a broader perspective: SMEs also influence the state's economic growth, increase per-capital income and capital formation, and boost government tax revenue in the long run. During the economic crisis in 1998 and 2008, SMEs acted as a shield, protecting Indonesia's economy from jeopardy. In 1998, when the financial crisis occurred due to the plummeting rupiah exchange rate and the loss of market and public confidence, the Akatiga Foundation (1999) conducted an economic crisis impact study that surveyed 800 SMEs. The study found that export-market-oriented SMEs and locally sourced raw materials were precisely responsible for the profit increase. Fast forward to a decade later, when the global financial crisis that triggered the property market collapse in the United States (USA) took place, the Akatiga Foundation also found SMEs relatively unaffected. This is due to the limited linkage of SMEs to the global market, the absence of foreign debt taken on by SMEs, and the orientation of SMEs to the local market. Only SMEs related to export markets are relatively affected.

With all those potential effects exposed to SMEs, it is shown that SMEs are not risk-free businesses. Instead, it is fragile due to the limited size of its sales, capital, and outreach. SMEs stay strong due to their collective roles and contributions to business operations. The strength of SMEs emerges with their myriad amount. However, when scaled down to an individual base, the SME is a must-helped business to survive. Putting tax into the context of supporting SMEs means discussing to what extent tax may distort entrepreneurial decisions. Tax-related issues, including multiple taxation, high tax rates, and poor tax incentives, resulted in tax burdens will impede entrepreneurial sustainability after all the enormous contributions of SMEs that could not be underestimated. Although there has yet to be a consensus about the ideal tax system for SMEs. It has been widely accepted that it is the one understandable by SMEs including simplicity and room for their improvement. Simplicity will allow SMEs to comply with tax rules with minimum or no costs. Meanwhile, room for improvement represents understanding given by the state to support business continuity of SMEs.

Simplification of regulation for SMEs refers to the reformulation of formal procedures allowing SMEs to be exempted from any incessant reporting obligation. Compliance costs tend to increase with the number of taxes an entrepreneur is subject to, the complexity of the tax rules, the frequency of submitting tax returns, and the number of levels of government involved in levying and collecting tax (OECD, 2017). This paper suggests that simplification also enable SMEs to use different form of annual tax written. In Indonesia, more unnecessary pages should be used when SMEs do their annual tax report. Reluctance raises among the SMEs to comply with tax when they see the forms. Features embedded in digital pages will ease this suggestion to be applied. Simplicity means provide incentives for taxpayers to comply since it will not take their time, effort, and attention too much than they have. 

Bigger room for SMEs to thrive is essential. The room connotes financial condition. The bigger the room, the easier it is for SMEs to grow. The more robust the financial capacity, the more possible SMEs can develop. Tax is out of the supportive list when we discuss the possibility of financial strength. However, it is unavoidable in business. Any business, including SMEs, will stumble upon tax issues or tax administration sooner or later. A fair taxation scheme to accommodate this conflict is to set a threshold. It will enable SMEs to refrain from being subjected to tax until a certain level of scales of either profit or turnover to enable SMEs to thrive. However, unfortunately, setting a fair threshold for SMEs to be tax-free is not a generic job since it is very case-specific, depending on the business classification. A rigid calculation should be applied when determining tax threshold for SMEs. It covers some variables, including input and output factors. Nevertheless, it may end up with a fairer limit for SMEs.

*) This article represents the author's personal views and does not represent the stance of the institution. 

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