Trade and Tax Evasion in Indonesia

Abstract

Based on an analysis of trade data between Indonesia and Singapore at the six-digit level of classification, we find evidence of import tax evasion: exports from Singapore to Indonesia are under-reported to Indonesian Customs, and the evasion increases in line with duty rates. Interestingly, evasion appears to have more to do with value-added tax, which is imposed on almost all imported goods. We also examine whether tariff discrimination under free trade agreements can result in an increase in goods from other countries being imported via Singapore and then re-exported to Indonesia, potentially violating the rules of origin (ROO). Finally, we find that the presence of non-tariff barriers designed to protect national industries may also motivate smuggling.