Page 12 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)

DDTC Working Paper 1015
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creates incentives that potentially undermine Property Tax P2 (Pajak Bumi dan Bangunan untuk
24
accountability of sub-national governments . sektor Perdesaan dan Perkotaan) were transferred
Therefore, making local tax bases broader has a fully to local governments. Based on calculation
number of potential benefits. If service delivery is conducted by TADF team (Assistance Team of
more closely linked to local tax payments, citizens Fiscal Decentralization to the Minister of Finance),
face greater incentives to monitor government there was an increase in the ratio of locally owned
performance and demand accountability from resource (Pendapatan Asli Daerah – PAD) to Local
local governments. At the same time, it can further Revenue. However, tax ratio and tax per capita are
enhance inter-jurisdictional competition and considerably low. This leads to a conclusion that
people choosing low tax – low spending jurisdictions after the enactment of Law 28 of 2009, there is still
over high tax – high spending jurisdictions could a big tax gap between the potential and actual tax
create powerful incentives to increase spending receipt.
efficiency. If Indonesia wants to benefit from
these effects greater, the local taxation autonomy Primary agenda to solve the above mentioned
is indeed a necessary institutional prerequisite. problems is to widen the tax base by improving
In conventional Keynesian economics, it is stated current tax administration system. As explained
that an increase in tax could hamper GDP if it is not in the previous section, local govenments need
properly managed. Government budget especially to utilitize more sophisticated technology, for
in Indonesia still relies heavily in tax collection example by utilizing GIS (Geo-Spatial Information
to finance its expenditure. The decision to reduce System) and not soley relying on the date from
collection of property tax especially for the poor the sale of property, as part to increase tax base
one is a good steps toward improving the whole and determine rate structure. Local government
economy. is also required to establish a monitoring activity
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and toughen enforcement . For business taxes,
According to Law No 28 of 2009, two taxes local leaders firstly should create a more conducive
previously managed by the central government, business environment and develop a system that
i.e. Land and Building Transfer Fee (Bea Perolehan could generate and record accurate information on
Hak atas Tanah dan Bangunan – BPHTB) and business transactions.

24 Rodden, J. (2002), “The Dilemma of Fiscal Federalism: Grants and 25 Several cities across the globe use media to strengthen enforcement
Fiscal Performance around the World”, American Journal of Political in property taxes.
Science 46 (3), p. 670-687.

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