What is the shadow economy? According to the IMF (2018) in their published working paper, the shadow economy is all economic activities that are hidden from official authorities for monetary, regulatory, and institutional reasons. From that understanding, we can summarize that the shadow economy is a phenomenon of economic activity that is deliberately hidden by the actors with various motives, but the main thing is to avoid government regulation.
So what is the purpose of avoiding government regulations? There are various objectives, the most common of which is to avoid government regulations that are considered detrimental to the perpetrators, such as tax regulations and other fiscal policies. There are also those who carry out illegal economic practices so that the government does not detect them because their transactions tend to be “unlawful” such as trading in narcotics, prohibited goods, protected animals and smuggling which is prohibited by law.
The shadow economy itself is divided into four types of activities according to the Organization for Economic Co-operation and Development (OECD), namely underground production activities, illegal production, informal sector production, and household production. Interestingly, according to the OECD, the influence of the shadow economy is one of the factors that impact a country’s economy. Thus, the shadow economy is one of the scourges that overshadows a country’s economy today.
In Indonesia itself, the tax ratio which is still low is one of the influences from the behavior of the shadow economy. According to the OECD, 57% of the workforce in Indonesia is in the informal sector. This means that this sector tends not to be seen by government regulations directly and is not touched.
The informal sector itself is of many kinds and indeed the tax authorities often cannot reach this sector because regulations are difficult to apply to them. This leaves a lot of potential tax revenue off the table. Even if it is projected, it is possible to significantly increase state revenue.
Shadow economy actors are like small fish caught using large perforated nets. Many of them record their income under Non-Taxable Income (PTKP). As a result, they are not required to register as taxpayers and have a Taxpayer Identification Number (NPWP) and cannot be taxed according to existing regulations.
As an illustration, let’s talk about MSMEs which represent the household sector. The number of MSMEs based on data from the Ministry of Cooperatives, Small and Medium Enterprises per 2022 there are 8.71 million MSMEs. This data cannot be taken for granted that really the income derived from these 8.71 business actors falls into the category of micro and small businesses.
MSMEs themselves are included in one type of business actor that is prone to shadow economy practices. Let’s just assume that there are one million MSMEs that by regulation have not been touched by the MSME Final Income Tax regulations because they have not registered themselves as taxpayers. Of the one million MSMEs, it is also assumed that their annual income is IDR 600 million. Then with the non-taxable limit according to PP 23 of 2018, Rp. 100 million of their income will be subject to the MSME Final PPh rate of half a percent.
Approximately IDR 500 thousand income tax paid by one MSME actor. What about 1 million MSMEs? There is IDR 500 billion of tax revenue that has the potential to be lost as a result of the shadow economy. Only because the rules have not been able to reach the perpetrators with existing regulations. And this is only from UMKM which incidentally reflects the household or informal sector
Moreover, so far the obligation to register as a taxpayer and have an NPWP is a voluntary obligation. It is increasingly difficult to reach and identify the truth of the value of transactions carried out by these underground economic actors. And what’s worse, the longer it is left unchecked, the greater the potential loss of taxes that should be paid by them.
Responding to this, the government did not remain silent. Several steps were taken by the Indonesian government by amending several regulations. Among other things, applying the National Identity Number (NIK) as a tax identity to replace the NPWP as of January 1, 2024. With the enactment of this rule, it is hoped that it can overcome too wide a net. At the very least, the informal sector that has not been touched by regulations can be seen first to then make the most appropriate policies for them later.
Then, for household sector economic actors, in this case MSMEs, the government regulates that economic sectors with an turnover of under Rp. 500 million are not subject to income tax. At least this regulation can reduce the existing tax ratio gap. So that the application of existing tax regulations can be optimized again. In addition, this regulation can also encourage actors in the household economic sector to move up to the next level. As they move up a grade, the rules for taxing their efforts will be clearer and fairer. It is hoped that this will reduce shadow economy practices.