Page 6 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)

DDTC Working Paper 1015
6

3. Decentralization in Indonesia
values on an annual basis. That means that to
maintain property tax revenues in real terms
local jurisdictions would have to increase the upon a rapid and ofTen called
tax rate regularly and this leads to taxpayers as “big bang decenTralizaTion”,
resistance and discontent. indonesia has Transformed as
In order to improve property tax collection, city more decenTralized ones. The idea
like Bogotá in Colombia has proved that political of “money follows funcTions” was
will, technical expertise and condusive investment considered.
climate can significantly increase property tax
proceeds. The city was able to regularly update data
on the property tax base, improve the structure of Before the Asian Crisis in 1997/98, Indonesia
the property tax rate as well as conduct reformation was recognized to have the centralistic government
to its tax administration. Tax officials should be where all sub-national governments should follow
able well-trained and knowledgeable to most of tax direction from and responsible to the central
collection cases. Table 3 provides information in government. After the crisis or during President
different countries on how to assess the property Habibie, Law no 22 of 1999 on Regional Autonomy
tax base. was enacted. In the new law, government functions
are devolved to sub-national governments, except

Table 4 - Assessing the Property Tax Base

Tax Base Definition Measure used Where Used Tax Rate and The Range

Size of property
Assessed unit adjusted to account M2 of land and Armenia, Belgium, Bulgaria, Portugal: LGs set the tax rate,
value or area for quality and building area, Denmark, Germany, Israel, within 0.7 percent and 1.3
based adjusted Italy, Poland, Portugal, Spain percent.
structures
Denmark: LGs within 1.6 percent
and 3.4 percent. Spain, Poland,
Australia, Canada, Hungary, and Italy: LGs within a cap set up
Price of potential
Market value Comparable sales Japan, Netherlands, South by central government. Germany:
sale or purchase
Africa, United States set up by local governments.
Bulgaria: 0.15 percent of value of
property.
France, India, Ireland,
Rental value Value in current use Net rental income Morocco, Pakistan, United In Hungary, set by local government.
Kingdom
In United Kingdom, as function of
Determined by
Self- assessment Sales price Peru, Turkey a cap. In France, local governments
owner of property
with a cap.
Source: Slack 2009, DEXIA 2008.
Note: LG – local government

for six absolute powers (i.e. foreign affairs, defense,
In many developing countries, the national
security, justice, national monetary and fiscal, and
government may set the rates for property taxes,
religion) that are still part of central government
in the form of either a cap or a range of rates. Sub-
jurisdiction. Regional government is provided with
national governments may vary rates by class of
authority to develop according to its preferences.
property, for example, residential, commercial,
However, in accordance to the concurrent
and industrial. Often sub-national government
functions, local governments are obliged to conduct
can establish their own tax rate, within a range of
mandatory functions such as the fulfillment of
values agreed with the central government. Billing,
minimum service standards in the area of public
collection and enforcement have a substantial
health, food security, basic education, public works,
impact on the performance of the property tax.
transportation, etc.
Public awareness of simple and effective payment
procedures and enforcement such as judicial sale At the end of Megawati Soekarnoputri presidency
15
or arrest usually induces voluntary compliance . term, there was a single event that is very influential
in determining the future of decentralization
15. Roy Bahl (Property tax reform in developing and transitional
countries, 2009) summarizes way of administrative reform to increase
property taxes collection: a) increase coverage (GIS, mapping); b) upgrade cooperation and unique numbering system); d) improve collection rate
valuation (training, procedure); c) unified record keeping (interagency (reduce preference, reduce compliance cost, thoughen enforcement).