Tax Non-Compliance and Perceptions of Corruption: Policy and Implications

for Developing Countries

Corruption in particular creates inefficient tax system, eliminates tax collection
legitimacy, and reduce the willingness either individual or corporate to pay tax, in result
tax revenue decreases. In order to increase tax revenue, developing country should
reduce the corruption first. Corruption used to be assessed with subjective
measurement called perceptions of corruption. Perception of corruption can be more
harmful than corruption itself, it can raise negative behavior of tax payers such as
creating a distrust among stakeholders toward related institution that in the end will
disengage reciprocal relationship with the government and underreport the income
that can lower the taxes or choose to bribe the tax officials.

There are two classification of corruption, grand corruption, misuse public

power by high level public officials such as ministers or senior staff to gain money, and
petty corruption, extortion of small payments by low level public officials in everyday
transaction to smoothens transactions. Lack of education about tax among Indonesian
people are the caused why petty corruption mostly happens in the daily basis. People
sometimes does not understand about the procedure, therefore people tend to choose
the shortcut by paying to the public officials.

Tax compliance is taxpayer willingness to accurately report their income. In this

context, we classify tax compliance behavior into two, intentional compliance and
intentional non-compliance. Perception of people towards corruption influences
intentional underreporting by personal income tax payers (PIT) in Indonesia, while the
belief of taxpayer if the government system is ineffective make PITs evades taxes and
thus weaken taxpayers’ willingness to contribute their fair state of tax. Indonesia’s
Directorate General Tax needs to establish strategic alliances and partnership with
other relevant government representatives to increase the compliance by identifying,
controlling and catching those who evade. The government should make a strong
advertisement of fiscal exchange between government and tax payers, therefore, it
will persuade people to pay a fair tax. Range of options should be considered to
influence taxpayers’ behavior, such as identification and registration of tax payers,
verification of received information, and provision of service excellence and assistance
to taxpayers.