Vol 2 Number 2.

2023
Pp:99-105
ISSN:2964-2906
e-ISSN; 2964-3635
https://scientium.co.id/journals/index.php/sler

TAX COMPLIANCE IN INDONESIA: A LEGITIMACY PERSPECTIVE

Didit Santoso
Trisakti University, Jakarta, Indonesia. Email: diditedu888@gmail.com

Abstract

The hard efforts of the tax authorities in Indonesia to improve their regulations in order to
increase taxpayer compliance have not been satisfactory, considering that the level of
taxpayer compliance in reporting the Annual Tax Return (SPT) in 2017-2021 is still the
highest at 84.07%. Based on the background, analysis and discussion, it is concluded that the
occurrence of tax avoidance and tax evasion, which causes a decrease in the level of
compliance and not maximizing tax revenue, must be handled by strengthening tax
legitimacy (law) in Indonesia. Strengthening tax legitimacy in Indonesia must be based on
the elements of legitimacy in the form of cognitive legitimacy, moral legitimacy, and
pragmatic legitimacy.

keywords: tax compliance, legitimacy theory, tax rights and obligations

A. Introduction

Since Indonesia implemented several tax laws in 1983, such as Law No. 6 of
1983 on General Provisions and Procedures of Taxation, Law No. 7 of 1983 on
Income Tax, and Law No. 8 of 1983 on Value Added Tax, the country expects a
significant increase in taxpayer compliance. One of the significant changes that will
also be a big challenge for the tax authority, namely the Directorate General of Taxes
(DGT), is the change in tax collection from the official system to the self-assessment
system (SAS), as stipulated in Law Number 6 of 2023 concerning the Stipulation of
Government Regulation in place of Law Number 2 of 2022 concerning Job Creation
into Law (KUP Law) which states that every taxpayer is obliged to fill out a Tax
Return correctly, completely, and clearly to the Directorate General of Taxes (DGT)
office.
Forty years since the enactment of the KUP Law in 1983, tax authorities in
Indonesia still face challenges related to SAS, one of which is compliance with the
reporting of tax returns that must be filled in and reported by taxpayers themselves.
Some empirical evidence shows that tax compliance still needs improvement despite
regulatory improvements. First, although taxpayer compliance in reporting annual
tax returns and paying taxes has tended to increase in the last five years, the
compliance ratio for tax return reporting in 2017-2021 is still the highest at 84.07%.
DGT noted that the compliance ratio of tax return reporting by taxpayers reached

The Scientia Law and Economics Review. Vol 2 No 2. December 2023

84.07% in 2021 (with 15.9 million tax returns reported from 19 million taxpayers),
the tax compliance ratio in 2020 was 78%, the tax compliance ratio in 2019 was
73.06%, the tax compliance ratio in 2018 was 71.1%, and the tax compliance ratio in
2017 was 72.58%.1 Second, tax evasion is still rampant on a global and national scale.
The global scale can be seen from the Panama Papers case that revealed 11.5 million
leaked documents from more than 214,488 offshore entities since the 1970s. In
addition, the Nasser investigation estimates that around USD200 billion of
Indonesia's wealth is parked abroad, and around USD100 billion is in the country.
Third, in Indonesian tax courts, several taxpayers have been found guilty of tax
evasion, such as in the case of LKF as a director who was sentenced to imprisonment
and a fine.2
DGT has worked hard to improve its regulations to increase taxpayer
compliance. DGT has implemented tax amnesty or its equivalent several times from
1964 until 2022, including tax amnesty in 1964 and 1984, Sunset Policy in 2008,
reinventing policy in 2015, and tax amnesty from July 2016 to March 2017. Some
literature suggests that tax amnesty initiated by a country has two important
objectives: increasing revenue and reducing taxpayer non-compliance. 3 With
regulations governing tax rights and obligations in Indonesia and the many efforts
that the DGT has made to improve tax compliance in Indonesia, this study needs to
answer problems related to how ideally tax compliance arrangements in Indonesia
should be based on legitimacy theory.

B. Analysis and Discussion

1. Literature Review on Tax Compliance

The problem of tax compliance has arisen since tax collection was introduced.
Research on tax compliance has become a very popular academic topic, as all modern
societies face the challenge of addressing tax evasion and the harm this phenomenon
causes to government revenues.4
Tax compliance has been studied from many perspectives, including public
finance, law enforcement, organizational design, ethics, and several perspectives. 5
Nuraprianti et al.6 and Alm7 emphasized that tax payment is part of taxpayers'
compliance with the state. However, such compliance can be thwarted by tax evasion
as individuals and companies do not pay their tax obligations promptly. Palil and
Mustapha argued that the main tax administration approach used in determining tax
1
Vika Azkiya Dihni, (04/08/2022), "Rasio Kepatuhan Pelaporan SPT Pajak Tercapai 84% pada 2021",
available at https://databoks.katadata.co.id/datapublish/2022/08/04/rasio-kepatuhan-pelaporan-spt-pajak-
tercapai-84-pada-2021 (accessed 25 September 2023).
2
Verdict of the South Jakarta District Court number 1196/Pid.B/2009/PN Jkt.Sel, dated October 5, 2009.
3
Jeffrey A. Dubin, Michael J. Graetz, and Louis L. Wilde, “State Income Tax Amnesties: Causes,” The
Quarterly Journal of Economics 107, no. 3 (1992): 1061.
4
Paleka, Hana, and Vitezić, Vanja, (2023), "Tax Compliance Challenge through Taxpayers’ Typology"
Economies 11, no. 9: 219, https://doi.org/10.3390/economies11090219.
5
James Andreoni, Brian Erard, and Jonathan Feinstein. “Tax compliance.” Journal of Economic Literature
XXXVI (June 1998): 818.
6
Nuraprianti, D., Kurniawan, A., & Umiyati, I. (2019). Pengaruh Etika Uang (Money Ethics) terhadap
Kecurangan Pajak (Tax Evasion) dengan Religiusitas Intrinsik dan Materialisme sebagai Variabel
Pemoderasi. Fair Value: Jurnal Ilmiah Akuntansi dan Keuangan, 1(2), 199-217.
7
Alm, J. (2021). Tax evasion, technology, and inequality. Economics of Governance, 22(4), 321-343.

100 The Scientia Law and Economics Review. Vol 2 No 2. December 2023
compliance is SAS, as the supporting factors are, among others, the development of
the level of tax knowledge among taxpayers; its application usually results in
increased efficiency (such as reduction in the requirement to provide supporting
documents and proof of income and costs to the tax authorities when submitting tax
returns).8 Braithwaite argues that tax compliance can be improved by persuading
and encouraging taxpayers to cooperate. Given that such strategies do not
necessarily lead to high costs in the tax system, it is time for policymakers to
implement such strategies and stimulate voluntary tax compliance. 9 Then, Pertiwi et
al. explained that, in turn, the perception of tax justice would encourage taxpayer
compliance, considering that the theory of justice is built on a person's belief in the
sense of fairness and feelings of unfairness, which will impact compliant and non-
compliant behaviour.10 Furthermore, Doran and Das-Gupta et al. studied the factors
that affect tax compliance. Doran concluded that tax sanctions determine the
standard of behaviour that fulfils taxpayers' obligations to the government by
distinguishing compliant taxpayers from non-compliant taxpayers. The findings
indicate that tax compliance in the self-assessment system requires taxpayers to
report their tax obligations only based on legal positions that they believe are
reasonably correct and in good faith. 11 Das-Gupta et al. evaluated the impact of
reforms in income tax administration policy on tax compliance in India. Taxpayers
who voluntarily disclose higher income are thus placed in special assessment units.
To avoid this, high-income taxpayers feel they have an additional incentive to
understate their income.12
A more thorough study on the importance of tax compliance by wealthy
taxpayers for public efficiency was conducted by Gangl and Torgler (2020). The
study shows the need for a statistical clustering procedure by differentiating groups
based on their monthly income. This would highlight a better understanding of the
determinants of tax compliance of the rich and imply the need for practical solutions
that would lead to an optimal and fair tax system for the middle, lower and upper
classes. The results also show that while it is important to rely on economic
frameworks, strong evidence suggests that taxpayers are motivated by factors other
than purely financial ones. By understanding and improving tax morale and system
fairness and analyzing norms, there is potential to increase revenue with minimal
enforcement mechanisms.13
The various studies related to tax compliance show that tax compliance is
built on a legal framework that is fair, certain, and beneficial. The legal framework

8
Mohd Rizal Palil and Ahmad Fariq Mustapha, Factors affecting tax compliance behaviour in self
assessment system, African Journal of Business Management, Vol. 5, No. 33, pp. 12864-12872, 2011, p.
12864.
9
Valerie Braithwaite (ed), 2003, Dancing with tax authorities: Motivational postures and non-compliant
actions. In Taxing Democracy Tax Avoidance and Tax Evasion. Ashgate: Aldershot, pp. 93–108.
10
Pertiwi, A. R., Iqbal, S., & Baridwan, Z. (2020). Effect of fairness and knowledge on tax compliance for
Micro, Small, and Medium Enterprises (MSMEs). International Journal of Research in Business and Social
Science (2147-4478), 9(1), 143-150.
11
Michael Doran, Tax Penalties and Tax Compliance, Harvard Journal on Legislation, Vol. 46, 2009, pp.
111-161.
12
Arindam Das-Gupta, Shanto Ghosh dan Dilip Mookherjee, Tax Administration Reform and Taxpayer
Compliance in India, International Tax and Public Finance, Vol. 11, 2004, pp. 575–600.
13
Katharina Gangl, and Benno Torgler, 2020, How to Achieve Tax Compliance by the Wealthy: A Review
of the Literature and Agenda for Policy, Social Issues and Policy Review 14: 108–51.

The Scientia Law and Economics Review. Vol 2 No 2. December 2023

must be legitimate for the people to implement it based on high voluntary
compliance.

2. Legitimacy Theory and Its Importance in Improving Voluntary Compliance

The occurrence of tax avoidance and tax evasion, which has led to a decrease
in compliance and not maximizing tax revenue, raises questions about the legitimacy
of taxes in Indonesia. The literature on legitimacy shows that in complex fields,
including taxation, a lack of knowledge prevents the emergence of distorted
judgments and, therefore, inhibits change. At the same time, mechanisms such as
media attention, support for criticism, and the creation of crises can disrupt
institutionalized practices.14
Burlea and Popa conceptualize legitimacy theory as a theory that explains the
behaviour of organizations in implementing and developing voluntary disclosure of
social and environmental information to fulfil their social contract, which allows
recognition of their goals and survival in an agitated and turbulent environment.15
Furthermore, regarding legitimacy theory, Burlea and Popa (2013) suggest the
elements that form legitimacy, namely cognitive legitimacy, moral legitimacy, and
pragmatic legitimacy, which are influenced by cognitive legitimacy affecting moral
legitimacy, moral legitimacy affecting pragmatic legitimacy, and pragmatic legitimacy
affecting cognitive legitimacy. Cognitive and moral legitimacy are part of the internal
environment, while pragmatic legitimacy is external environment. 16 Cognitive
legitimacy refers to the spread of knowledge about a business, where one can assess
cognitive legitimacy by measuring the level of public knowledge about an activity. 17
The highest form of cognitive legitimacy is achieved when a product, process or
service is acceptable to a society or community. 18 Then, moral legitimacy means
universal ethical rules.19 Meanwhile, pragmatic legitimacy rests on the interests of
the closest stakeholders in an organization, which involves broader political,
economic, or social interdependencies. Thus, an organization's pragmatic nature
cannot be separated from protecting its shareholders' interests.20
The legitimacy theory shows that the tax authority must be able to produce
conformity between inherent (or implied) social values and community norms in
legitimizing every action or activity. So, in law enforcement that can increase tax
compliance and improve the tax ratio, the cognitive legitimacy of this research

14
Mattia Anesa, Nicole Gillespie, A. Paul Spee, Kerrie Sadiq, The legitimation of corporate tax
minimization, Accounting, Organizations and Society, Vol. 75, Iss C (2019): 17-39, DOI:
10.1016/j.aos.2018.10.004.
15
Burlea, Adriana Schiopoiu, dan Popa, Ion. (2013), “Legitimacy Theory”, dalam Samuel O. Idowu (Editor
in Chief), Encyclopedia of Corporate Social Responsibility, Heidelberg: Springer-Verlag Berlin Heidelberg,
pp. 1579-1584.
16
Ibid.
17
Aldrich, H.E., Fiol, C.M., Fools rush in? The institutional context of industry creation. Academy of
Management Review, Vol. 19, No. 4, 1994, hlm. 645–670.
18
Ibid.
19
Fred E. Foldvary, Moral Legitimacy, dalam Deen K. Chatterjee (Ed.), Encyclopedia of Global Justice,
New York: Springer Science + Business Media B.V., 2011, pp. 724-725.
20
Muhammad Azizul Islam, Barry J. Cooper, Shamima Haque & Michael John Jones (2022) Moral versus
pragmatic legitimacy and corporate anti-bribery disclosure: evidence from Australia, Accounting Forum,
46:1, 30-56, DOI: 10.1080/01559982.2021.1925037.

102 The Scientia Law and Economics Review. Vol 2 No 2. December 2023
reaches the law enforcement system in the field of taxation; moral legitimacy refers
to tax compliance, and pragmatic legitimacy refers to the tax ratio. The existence of
legitimacy theory in improving tax compliance shows that tax payment, which is part
of the state obligation of every citizen, cannot be separated from the existence of a
good tax system. However, when there is non-compliance in fulfilling tax obligations
in the form of tax avoidance and tax evasion, law enforcement in the field of taxation
is one of the solutions to handling non-compliance.
Increasing taxpayer compliance is one of the government's important hopes
to improve its taxation ratio in the era of implementing a self-assessment system.
Increasing taxpayer voluntary compliance is expected to increase tax revenues that
can finance development in Indonesia. 21 Of course, the problem of taxpayer
compliance in Indonesia must be addressed immediately, considering the problems
faced by the DGT related to the lack of taxpayer compliance. One of the problems in
the Indonesian tax system can impact tax revenue and tax ratio because tax non-
compliance that causes large amounts of tax evasion has resulted in a very low level
of tax revenue.22 The key to reforming the tax system of developing countries in
increasing tax revenue is to modernize the system, increase the effectiveness and
efficiency of tax collection, expand the tax base, and effectively prevent taxpayer non-
compliance.23

C. Conclusions and Suggestions

Based on the analysis and discussion, this study concludes that the occurrence
of tax avoidance and tax evasion that causes a decrease in the level of compliance and
not maximizing tax revenue must be handled by strengthening the legitimacy (law)
of taxes in Indonesia. Strengthening tax legitimacy in Indonesia must be based on the
elements of legitimacy in the form of cognitive legitimacy, moral legitimacy, and
pragmatic legitimacy.

Bibliography

Alm, J. (2021). Tax evasion, technology, and inequality. Economics of Governance,

22(4), 321-343.
Alm, J. (2019). Can Indonesia reform its tax system?: problems and options (No.
1906). (Tulane University, Department of Economics).
Aldrich, H.E., Fiol, C.M., Fools rush in? The institutional context of industry creation.
Academy of Management Review, Vol. 19, No. 4, 1994, hlm. 645–670.
Andreoni, James, Erard, Brian and Feinstein, Jonathan, “Tax compliance.” Journal of
Economic Literature XXXVI (1998).
21
Anis W. Hermawan, Voluntary Disclosure Program in Taxation and Its Certificates: A Philosophical
Perspective, Journal of Tax Law and Policy, Vol. 1, No. 2, 2022, hlm. 63–70, DOI:
https://doi.org/10.56282/jtlp.v1i2.119.
22
Alm, J. (2019). Can Indonesia reform its tax system?: problems and options (No. 1906). (Tulane
University, Department of Economics).
23
United Nations Economic and Social Council. (2006). Definitions of Basic Concepts and Terminologies in
Governance and Public Administration. A Report submitted by the Committee of Experts on Public
Administration.

The Scientia Law and Economics Review. Vol 2 No 2. December 2023

Braithwaite (ed), Valerie, Dancing with tax authorities: Motivational postures and
non-compliant actions. In Taxing Democracy Tax Avoidance and Tax Evasion,
Ashgate: Aldershot, 2003.
Burlea, Adriana Schiopoiu, dan Popa, Ion. (2013), “Legitimacy Theory”, dalam Samuel
O. Idowu (Editor in Chief), Encyclopedia of Corporate Social Responsibility,
Heidelberg: Springer-Verlag Berlin Heidelberg, pp. 1579-1584.
Das-Gupta, Arindam, Ghosh, Shanto and Mookherjee, Dilip, Tax Administration
Reform and Taxpayer Compliance in India, International Tax and Public
Finance, Vol. 11, 2004, pp. 575–600.
Dihni, Vika Azkiya, (04/08/2022), "Rasio Kepatuhan Pelaporan SPT Pajak Tercapai
84% pada 2021", available at
https://databoks.katadata.co.id/datapublish/2022/08/04/rasio-kepatuhan-
pelaporan-spt-pajak-tercapai-84-pada-2021 (accessed 25 September 2023).
Doran, Michael, Tax Penalties and Tax Compliance, Harvard Journal on Legislation,
Vol. 46, 2009, pp. 111-161.
Dubin, Jeffrey A., Graetz, Michael J. and Wilde, Louis L., “State Income Tax Amnesties:
Causes,” The Quarterly Journal of Economics 107, no. 3 (1992).
Foldvary, Fred E., Moral Legitimacy, dalam Deen K. Chatterjee (Ed.), Encyclopedia of
Global Justice, New York: Springer Science + Business Media B.V., 2011, pp.
724-725.
Gangl, Katharina and Torgler, Benno, How to Achieve Tax Compliance by the
Wealthy: A Review of the Literature and Agenda for Policy, Social Issues and
Policy Review 14: 108–51, 2020.
Hermawan, Anis W., Voluntary Disclosure Program in Taxation and Its Certificates: A
Philosophical Perspective, Journal of Tax Law and Policy, Vol. 1, No. 2, 2022,
hlm. 63–70, DOI: https://doi.org/10.56282/jtlp.v1i2.119.
Mattia Anesa, Nicole Gillespie, A. Paul Spee, Kerrie Sadiq, The legitimation of
corporate tax minimization, Accounting, Organizations and Society, Vol. 75, Iss
C (2019): 17-39, DOI: 10.1016/j.aos.2018.10.004.
Muhammad Azizul Islam, Barry J. Cooper, Shamima Haque & Michael John Jones
(2022) Moral versus pragmatic legitimacy and corporate anti-bribery
disclosure: evidence from Australia, Accounting Forum, 46:1, 30-56, DOI:
10.1080/01559982.2021.1925037.
Nuraprianti, D., Kurniawan, A., & Umiyati, I. (2019). Pengaruh Etika Uang (Money
Ethics) terhadap Kecurangan Pajak (Tax Evasion) dengan Religiusitas
Intrinsik dan Materialisme sebagai Variabel Pemoderasi. Fair Value: Jurnal
Ilmiah Akuntansi dan Keuangan, 1(2), 199-217.
Paleka, Hana, and Vitezić, Vanja, (2023), "Tax Compliance Challenge through
Taxpayers’ Typology" Economies 11, no. 9: 219,
https://doi.org/10.3390/economies11090219.
Palil, Mohd Rizal and Mustapha, F Ahmad Fariq, actors affecting tax compliance
behaviour in self assessment system, African Journal of Business Management,
Vol. 5, No. 33, pp. 12864-12872, 2011.
Pertiwi, A. R., Iqbal, S., & Baridwan, Z. (2020). Effect of fairness and knowledge on tax
compliance for Micro, Small, and Medium Enterprises (MSMEs). International
Journal of Research in Business and Social Science (2147-4478), 9(1) , 143-
150.
Undang-Undang Dasar Negara Republik Indonesia Tahun 1945.

104 The Scientia Law and Economics Review. Vol 2 No 2. December 2023
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Perpajakan sebagaimana diubah beberapa kali terakhir dengan Undang-
Undang Nomor 6 Tahun 2023 tentang Penetapan Peraturan Pemerintah
Pengganti Undang-Undang Nomor 2 Tahun 2022 Tentang Cipta Kerja Menjadi
Undang-Undang.
Verdict of the South Jakarta District Court number 1196/Pid.B/2009/PN Jkt.Sel,
dated October 5, 2009.
United Nations Economic and Social Council. (2006). Definitions of Basic Concepts
and Terminologies in Governance and Public Administration. A Report
submitted by the Committee of Experts on Public Administration.

The Scientia Law and Economics Review. Vol 2 No 2. December 2023