Modernization of the Tax Administration System: A Theoretical Review of Improving Tax Capacity

The canons of transaction theory requires taxation to rest on the principles of justice, certainty, comfort, and economics. However, as the government continues to demand for development finance and increasingly depend on tax revenues, the aforementioned principles have been neglected in taxation as can be empirically observed in the complaints, tax avoidance efforts, and tax revenue in Indonesia. The lower tax revenues of Indonesia compared with those of other countries indicate that the tax reforms implemented in the country from 1984 to date have produced sub-optimal results and require realignment. The reformation or modernization of a tax administration system aims to improve the effort or performance of tax collecting authorities. Such reformation may be conducted individually or by group to achieve more efficient, economical, and rapid outcomes. The modernization process focuses on organizational structure, procedure, strategy, and culture. In order for such modernization process to succeed, the tax structure must be simplified, appropriate reform strategies must be developed, and a strong political commitment to reforming the tax administration system must be ensured