Page 7 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)

DDTC Working Paper 1015
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in Indonesia: the parliament’s approval of the government’s willingness to actively generates
revision of Law 22 of 1999 on local government owned source revenue and to invest in public
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and Law 25 of 1999 on intergovernmental fiscal infrastructure . Furthermore, the dependency
relationship. The key features include greater on the central government has increased since
autonomy of local governments by dissolving the the start of decentralization. This conclusion is
hierarchical relationship with the province. Local strengthened due to proliferation of new local
government leaders would only need to report governments. Currently, there are 34 provinces
to local parliaments instead of the provincial and around 491 districts and municipalities in
governor. In addition, four categories of local Indonesia. Recent devolution of property tax
government revenues were defined: own sources; receipt to subnational governments brings positive
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balanced fund; local loans; and others . Law 32 effects to their financial condition. This will bring
of 2004 was then revised again under President more fiscal space to be used to invest in public
Susilo Bambang Yudhoyono to become Law 23 of
2014 where it describes in details about the direct Figure 2 - Composition of Local Revenues APBD 2014
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election of local leaders .
Upon a rapid and often called as “big bang Owned-source
decentralization”, Indonesia has transformed as 24% revenue
more decentralized ones. The idea of “money follows
Intergovernmental
functions” was considered. Or in other words, the 63% transfer
central government is responsible of providing
necessary capital grant to local governments
13% Other sources
to cover thier expenditure and to achieve the
minimum service standards. The transition
to a significantly more decentralized mode of Source : 2014 APBD (Local Budget)
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governance was smooth. Intergovernmental
transfers, through General Allocation Grant, Special
Allocation Grant, and Revenue-Sharing Grant, infrastructure.
have grown, both in relative and absolute terms.
Further, in 2004 the second round of democratic In addition, fiscal decentralization, from
elections, at both national and sub-national levels political economy perspectives, should be viewed
took place without any major interruptions. as a comprehensive system that involves in a)
However, there still exist some critical issues that local election; b) locally appointed chief officers;
come into consideration such as highly dependent c) significant local government discretion to raise
on central government transfer, weak local taxing revenue; 4) a division of spending responsibilities
power, and unachievable minimum local service or competencies among types of governments; 5)
delivery. Table 2 clearly defines highly dependency sub-national own-taxing authority and 6) rules
of subnational governments, on average, to central and regulation relating to local borrowing and debt
government transfer (63 percent). Meanwhile, management; and e) a special status for capital
the share of owned source revenue (OSR) to total cities. Moreover, the other conditions comprise:
revenues are about 24 percent, on average. This 1) freedom from excessive central expenditure
figure varies between high, medium, and low fiscal mandates, 2) unconditional transfers from higher-
capacity regions. DKI Jakarta, for example, has the level governments and 3) borrowing powers.
ratio of OSR to total revenue of about 50 percent.
Voters will hold their elected officials more
This figure will increase further once they receive
accountable if local public services are financed to
full authority to collect property tax.
a significant extent from locally imposed taxes, as
On average, both provinces and districts relied opposed to the case where financing is primarily
on the intergovernmental transfer to fund their done through central government transfers. To
expenditure of around 63 percent on average. do so, the tax must be visible to local voters, large
The figure shows that regions relied on the enough to impose a noticeable burden, and the
intergovernmental transfer. This condition has burden must not be easily imported to residents
created moral hazard and crowds out subnational outside the jurisdiction. Moreover, to capture the
benefits of fiscal decentralization, it is suggested
16. Brodjonegoro, B,”The Indonesian Decentralization after Law Revision:
Toward a Better Future? See http://www.econ.hit-u.ac.jp/~kokyo/
APPPsympo04/PDF-papers-nov/Indonesianpaper.pdf 19. However, some local governments perform much better than their
peers in collection owned source revenues. Municipalities such as
17. Law 33 of 2004 is currently under revision Surabaya, Semarang, Balikpapan, and Denpasar have increasing ratio of
18. Suhendra, M and Hidayat Amir,”Fiscal Decentralization in Indonesia: locally source revenue to capital transfer over the period of 2010-2014.
Current Status and Future Challenges”, Jurnal Keuangan Publik, Ministry This figure means that they tries to generate more owned revenue and
of Finance RI, September 2006 less dependent to central government transfer.