VAT THRESHOLD AND TAXPAYERS’ BEHAVIORAL RESPONSES

Abstract

Addressing the issue of downturned Indonesian Value Added Tax (VAT) performance due to its ineffective VAT design, this study seeks to provide empirical evidences according to the model borrowed from Keen and Mintz (2004). This study utilizes a population hinge on data ranged from 2014 to 2016 and employs calibration of parameters based on Indonesian context. As extension of the study, this paper also investigates the behavioral responses of the taxpayers by visualizes the density at around threshold. The result confirms that the optimum point of VAT threshold in Indonesia is estimated at IDR 1,8 Billion for 2014, IDR 1.6 Billion for 2015 and IDR 1.2 Billion for 2016, respectively. Estimating the gap between the current threshold and estimated optimum threshold leads a prospective 3% or IDR 10,8 Trillion additional annual VAT revenue. The more striking result to emerge from the research is the visualization of disproportional density distribution at around threshold, which suggests the propensity of taxpayers to locate themselves just below the threshold. In this sense, it implies the indication of VAT avoidance, where the taxpayers tend to deliberately report a lower annual sales to avoid exceeding the VAT registration threshold.