Presumptive income taxes and tax compliance costs : policy implications for small and medium-sized enterprises in emerging economies

Abstract

It has been suggested that the introduction of presumptive income tax regimes for small and medium-sized enterprises (SMEs) can help to reduce the tax compliance costs that these businesses face. Little evidence, however, is available to help us to evaluate whether this is indeed the case. This article discusses how a presumptive tax regime may impact upon the tax compliance costs of SMEs operated by individuals (individual SMEs) in Indonesia in 2019 and suggests that the use of such regimes can have a beneficial effect on such businesses. It considers all components of tax compliance costs, including explicit, implicit, and psychological costs. By applying a mixed-modes research method, two main findings are highlighted. First, the presumptive tax significantly reduces explicit costs, although it does not appear to influence the implicit and psychological costs incurred by individual SMEs in Indonesia. Secondly, the combination of explicit and implicit costs indirectly affects the psychological costs through the existence of tax disputes and tax stressors. Not only do the results provide us with a new understanding of aspects of tax compliance costs, they show how the components of the costs interact with each other. While the empirical application is countryspecific, the conceptual framework developed in the study does not exclusively relate to taxpayers in Indonesia and can be applied to other countries or in other public regulation studies.