Balancing Convenience and Fairness in Tax Policy

by Dr. Ruston Tambunan, President of AOTCA

In most jurisdictions, income tax is assessed on profit or net income, as profit most accurately represents an individual’s or company’s capacity to pay. The tax is calculated at the applicable rate on this profit. However, for specific income types, tax is imposed on gross income or turnover at a predetermined rate. This approach, known as presumptive taxation (Victor Thuronyi, 2003), assumes that taxpayers generate a minimum net income based on a percentage of turnover, thus requiring tax payment even when no profit is realized.

In Indonesia, government regulations mandate turnover-based income tax for certain income categories, including construction services, real estate, and property rentals. Furthermore, Small and Medium Enterprises (SMEs) with annual turnover not exceeding IDR 4.8 billion are subject to turnover-based income tax, although this measure is intended as a temporary provision.

Convenience and certainty

In Indonesia, turnover-based income tax is designated as Final Income Tax (PPh Final). Upon payment, the tax obligation is deemed satisfied, and this income is excluded from aggregation with other income for general tax rate calculations. The calculation is straightforward: the applicable rate is multiplied by total turnover, eliminating the need to determine deductible expenses as required under net income-based taxation.

Simplified taxation offers greater certainty, as it is more easily interpreted, calculated, and monitored by tax authorities. In tax administration, simplicity and convenience are often prioritized.

The meaning of fairness in taxation

For example, two companies operating in the same sector, each with an annual turnover of IDR 4 billion, may exhibit different profit margins: one at 25 percent and the other at 5 percent. Under a turnover-based income tax regime with an MSME rate of 0.5 percent, both entities pay IDR 20 million in tax, despite significant disparities in profitability. As a result, the company with the lower profit margin bears a disproportionately greater tax burden.

The principle of equity is foundational in taxation. Its central tenet is that individuals or entities with equivalent economic capacity should bear identical tax burdens, while those with greater capacity should bear proportionally higher burdens. This principle is rooted in the concept of ability to pay, whereby income tax should align with economic capacity. According to John Stuart Mill (1930), the ability-to-pay principle represents a concrete manifestation of fairness.

A profit-based taxation system also introduces challenges. It requires rigorous bookkeeping and precise financial reporting. Businesses must be prepared for tax audits, which can lead to disputes and increased compliance costs.

Maintaining a Balance

Striking a balance between simplicity and fairness in taxation is inherently complex. Excessive complexity can reduce effectiveness and increase non-compliance, as taxpayers may face procedural obstacles and officials may encounter difficulties with monitoring. Such complexity can jeopardize revenue targets. Conversely, if taxes are perceived as unfair, public trust in the system and the legitimacy of taxation may deteriorate.

Tax policy should avoid extremes. Tax systems must be sufficiently simple to administer and adequately fair to ensure public acceptance. A simplified regime is suitable for small businesses with limited administrative capacity; however, as businesses grow, profit-based taxation better reflects fairness. Therefore, Final Income Tax should not be regarded as a permanent solution.

Ultimately, the central question is whether tax policy should prioritize convenience or fairness. While convenience improves collection efficiency, perceived unfairness may reduce compliance. If taxes are not viewed as reflecting economic capacity, both revenue and public trust are likely to diminish. The effectiveness of tax policy should be evaluated not only by its efficiency but also by its fairness to taxpayers.

This article was published in Bahasa on 9 March 2026 at https://www.kompas.id/artikel/kebijakan-perpajakan-antara-kemudahan-dan-keadilan