Often Referred to by the Government, What is the C-Efficiency Ratio of VAT?

IN a meeting with the DPR on June 28, 2021, the government proposed a reform agenda in the value-added tax (VAT) sector through the revision of the KUP Law. One of the reasons put forward is that the c-efficiency ratio is not optimal, which is 0.6.

The purpose of the evaluation and measurement is to review whether or not the VAT policy and administration are optimal for revenue (Ebrill, et al., 2001). Quantitative measurement is very useful as a consideration in designing reforms in the VAT sector.

Measurement of revenue performance, especially VAT, can be done through various indicators. The majority of these indicators use the realization of VAT receipts as the numerator and economic activity that reflects the potential for VAT as the denominator.

Initially, academics and policymakers used a simple measurement, namely the VAT ratioThis indicator is calculated simply, namely with the formula for VAT/GDP receipts. The majority of classic books on VAT and tax policy use the VAT ratio as an indicator.

However, there are some drawbacks to this indicator. First, if GDP is used as the denominator. GDP is the accumulation of all economic activities, not only consumption which is the object of VAT. Therefore, the calculations are potentially biased.

Second, comparisons between countries will be difficult because each country has different VAT rates. For example, a comparison of the performance of two countries’ VAT receipts with relatively the same GDP but different VAT rates will give biased results. Countries with higher VAT rates will have relatively better VAT revenue performance. In short, not apple to apple.

Therefore, there are other measurement alternatives. For example, the VAT efficiency ratio is calculated by the VAT revenue formula/(VAT rate x GDP). This measurement is considered more precise than the measurement of the VAT ratio because it has used the VAT rate variable ( standard rate ). Thus, the denominator is considered to have taken into account a more real tax base.

For example, Indonesia has a GDP of IDR 15,432 trillion in 2020. With a 10% rate, the potential VAT base is projected to be IDR 1,543 trillion. The calculation of potential VAT revenue based on this indicator has also been used several times in various public discussions.

The question is, is it true that the potential for VAT revenue is that big? The answer is not necessarily. This is because similar to the criticism of the VAT ratio, there is still an assumption that all GDP reflects the basis or object of VAT. That is the reason for the emergence of the VAT c-efficiency ratio.

Unlike the efficiency ratio, the c-efficiency ratio does not use the entire GDP as a component of the calculation. However, using the consumption component in GDP only. The formula used is VAT receipts/(VAT rate x GDP from the consumption sector). In other words, this indicator is considered more appropriate to describe the actual potential VAT revenue (Keen, 2013).

Apart from the three indicators above, there are at least two other indicators. First, is the VAT gross collection ratioIn this case, what is taken into account as the basis for VAT is GDP which comes from household consumption specifically.

The second is the VAT gapThis indicator is calculated by measuring the difference between potential and realized VAT receipts. The potential VAT revenue is based on estimates from more detailed national economic statistics, such as household surveys, IO tables, and so on.

These two indicators are considered more precise but have challenges in their measurement. This challenge is caused by the availability of data and the difficulty in estimating it with precision. Moreover, the VAT gap is also very dependent on the research data and the model used.

It is not surprising that the comparison of VAT performance between countries rarely uses the VAT gross collection ratio and the VAT gap. Comparative studies tend to use the c-efficiency ratio (Ueda, 2017). In conclusion, until now the c-efficiency ratio is considered an indicator that best reflects the reliability aspect (reliability ) as well as feasible.

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