Individual tax compliance in Indonesia: evidence from Tanah Abang market and Benford’s law

This study intends to detect Unplanned Evasion (UPE) among individual taxpayers in the Micro, Small and Medium-Sized Enterprise (MSMEs) sector in Indonesia. UPE refers to manipulation by taxpayers at the time of filing their tax obligations. The main focus of this study is the Tanah Abang market, which has a vital role in the garment and textile trade in Indonesia, where most of the sellers are MSMEs. This research uses internal data from the Directorate General of Taxes to contribute to novel evidence. The study uses Benford's law to detect UPE under the assumption that if taxpayers report their taxation correctly, digit numbers will follow the Benford's law distribution. If the digit frequency of reported income in Tanah Abang Market does not follow Benford's law's expected frequency, there is an indication of tax evasion in the aggregate. The results based on the first digit and first two-digit tests showed that reported income did not follow Benford's law. The second digit tests yielded more mixed and only suggestive evidence of non-conformity with the law. To measure the magnitude of UPE, this study uses a distortion factor model, suggesting a distortion of –11.28%. The study concludes that there is substantial UPE at the aggregate in this marketplace. The study further explores heterogeneity by gender and age, finding that UPE is concentrated among men and older taxpayers. The Benford’s law analysis is complemented with an individual level investigation of the effect of age and gender on tax compliance. Regression results indicate that men were more likely to comply than women, while older people tended to comply with taxes more than younger people. The study concludes by discussing tax policy implications in the context of Indonesia.