Formal Tax Compliance in Indonesia through Electronic Tax Filing: A Case Study of Micro, Small, and Medium Enterprises (MSMEs)

We investigated the possible correlation between business size and formal tax compliance use: data from the Directorate General of Taxes at the province level in Indonesia for 2014 – 2018. We employed the aggregate business-level Micro, Small, and Medium electronic tax filing data combined with the Base Transceiver Station data at the provincial level. We found that micro and small-scale taxpayers e – filing rate has a positive and significant effect on formal tax compliance. Yet, both have a non-linear relationship to formal tax compliance. These results imply that size or business scale MSME taxpayers is associated with formal tax compliance, and greater benefits can be obtained in a province with a high microscale taxpayer's e – filing rate.


Abstract:
We investigated the possible correlation between business size and formal tax compliance use: data from the Directorate General of Taxes at the province level in Indonesia for 2014 -2018. We employed the aggregate business-level Micro, Small, and Medium electronic tax filing data combined with the Base Transceiver Station data at the provincial level. We found that micro and small-scale taxpayers e -filing rate has a positive and significant effect on formal tax compliance. Yet, both have a non-linear relationship to formal tax compliance. These results imply that size or business scale MSME taxpayers is associated with formal tax compliance, and greater benefits can be obtained in a province with a high microscale taxpayer's e -filing rate.
Tujuan penelitian kami untuk mengkaji korelasi antara skala usaha wajib pajak dengan kepatuhan perpajakan formal yang menggunakan data Direktorat Jenderal Pajak pada level provinsi dalam kurun waktu 2014 -2018. Kami menggunakan data agregat wajib pajak UMKM yang melaporkan SPT elektronik yang dikombinasikan dengan data Base Transceiver Station pada level provinsi. Metodologi penelitian yang digunakan adalah metode kuantitatif dengan regresi panel data. Hasil regresi panel data menunjukkan adanya hubungan signifikan antara kepatuhan pelaku usaha berskala mikro dan skala kecil dengan tingkat kepatuhan formal pelaku UMKM pada suatu provinsi. Namun hasil penelitian juga menunjukkan bahwa hubungan tingkat kepatuhan wajib pajak berskala mikro dan kecil bersifat tidak linier terhadap kepatuhan perpajakan formal. Kesimpulan penelitan memperlihatkan bahwa skala usaha wajib pajak UMKM berasosiasi dengan kepatuhan perpajakan formal dan provinsi dengan tingkat e-filing wajib pajak berskala mikro yang tinggi memiliki tingkat kepatuhan lebih baik. INTRODUCTION Tax compliance is one of the most important problems faced by all countries in the world. The Attitude to Compliance Pyramid built by the Australian Taxation Office illustrates that Micro, Small, and Medium enterprises (MSME) are in the Tries and Supporters group. These two groups' compliance level is low due to a lack of understanding and inability to comply with applicable tax regulations. Therefore taxpayer compliance is expected to be related to the size or scale of the taxpayer's business. Indonesia also faces the problem of low MSME taxpayer compliance. Data from the Directorate General of Taxes of the Republic of Indonesia exhibits that the formal tax compliance of MSME taxpayers continues declining every year from 55% in 2014 to 38% in 2017. This is indicated by the number of MSME players who have registered as taxpayers of 1.5 million until 2017, but the number of taxpayers who have reported annual tax returns is only around 38% or as many as 563,455 people until the same year. One of the possible factors that can explain the low taxpayer compliance is the size or scale of the taxpayer's business. We examined whether a taxpayer's characteristics such as the business size correlate with formal tax compliance measured by e -filing rate. We chose Indonesia, one of the world's biggest developing countries because its population is near 270 million people with an estimated number of potential taxpayers of 165 million people. This study argues that in a developing country like Indonesia, the high level of micro-scale taxpayers' compliance may improve tax compliance overall.
Some previous studies regarding the effect of electronic tax filing on tax compliance mostly focused on the use of e-filing. Most of the existing research only shows user behavior after using e-tax filing (e-filing) or the sustainable behavior of users after using e-filing (Akram et al., 2018;Veeramootoo et al., 2018;Santhanamery & Ramayah, 2015). To our knowledge, their findings failed to account for the size or scale of taxpayers' business to the level of tax compliance. Accordingly, this research attempts to provide an empirical analysis of the association between MSMEs' characteristics and Indonesia's formal tax compliance.
The number of Indonesian residents while registered in the national taxpayer master file by the end of the year 2019 was only 42 million people (Alm, 2019). By analyzing Indonesia's formal tax compliance, this research is the first to employ the aggregate data of Electronic Annual Tax Returns reporting by MSME taxpayers in every province has been applied to examine the interrelationship between business size on formal tax compliance.
Taxpayers with high and low-income levels have low tax compliance while taxpayers with middleincome levels have higher tax compliance (Richardson, 2006

Tax Compliance
Tax compliance is an act of lodging the income tax return, stating all the taxable income truthfully, and paying all the tax obligations within the specified period without waiting for the authority for any follow-up actions (Singh, 2003;Night & Bananuka, 2018). Further, tax compliance refers to fulfilling all tax obligations as specified by the law wholly and freely, or the degree to which a taxpayer complies or fails to comply with the tax rules of their country (Braithwaite, 2009;Musimenta et al., 2017;Sadress et al., 2018). This research adopts the definition of tax compliance as suggested by Singh (2003) and Night & Bananuka (2018). Musimenta et al. (2017) (Guztaman, 2020). Maisiba and Atambo (2016) argued that the e-tax system improves tax compliance, as it facilitates faster accessibility to tax services without a physical visit to the tax authority premises.  (Night and Bananuka, 2018). Therefore, taxpayers' attitude towards self-assessment must be improved to achieve a better tax compliance level (Nawawi and Salin, 2018). The adoption of an electronic tax system will depend on the perceived ease of use of the tax system and intensity of behavior (Khaddafi et al., 2018). assisting MSME to comply with the tax regulation.

Regulation of the Minister of Finance
In these two groups, the low level of compliance is due to a lack of understanding and inability to comply with applicable regulations. They are groups that have limited administrative capacity to be able to comply with tax provisions. According to these characteristics, the taxpayer's size or business scale is presumed to be associated with the tax compliance of MSME taxpayers in Indonesia.  These variables are also continuous in terms of rate.

Results
We present descriptive statistics results in     only continued to increase until 2017 ( Figure 3).
Then, the total number of small individual taxpayers and the number of small individual taxpayers using e-filing were declining in 2018.   After fulfilling the classical assumptions, I tested the hypothesis using panel data regression.
We examine three main independent variables which include Microi , Smalli , and Medium variables to determine whether the taxpayer's business scale is associated with formal taxpayer compliance in model (1). Table 2 illustrates the Fixed Effect test regression results, which shows that the sign of all principal independent variable coefficients is under the theory where the level of taxpayer income is positively associated with formal taxpayer compliance and is significant at alpha 0.01.

Conclusions and Recommendation
We have shown that the e-filing rate of micro and small-scale MSME taxpayers is significantly associated with the formal compliance of MSME taxpayers in Indonesia. We used panel data regression to examine the correlation between MSME size and formal tax compliance. We found that the e-filing rate of micro and small-scale taxpayers was positively and significantly correlated with the MSME formal tax compliance of a province.
In general, the formal tax compliance level of MSME taxpayers is still low due to a lack of understanding and inability to comply with applicable tax regulations. The non -compliance behavior of MSME taxpayers is presumed to be associated with the business size of MSME taxpayers. MSME taxpayers are indicated to have the limited administrative capacity to comply with appropriate taxation provisions. The compliance behavior of micro-scale taxpayers which is included in the Supporters group is willing to do the right thing. Hence, the government's strategy to boost micro and small-scale taxpayers' compliance is the simplification of regulations to support these taxpayers.
Our research has also shown that adopting an electronic system in a province with a relatively high number of micro-scale taxpayers to the total registered micro-scale taxpayers will increase the formal tax compliance of MSME individual taxpayers in the province. The results of this research indicated that the province that gets the most benefit from the adoption of an electronic system in submitting Annual Tax Returns by MSME taxpayers are provinces with a higher micro taxpayer e-filing rate. intensity of the implementation of electronic systems by MSME taxpayers to improve Indonesia's formal tax compliance.

IMPLICATION AND LIMITATION
Our