Page 8 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)

DDTC Working Paper 1015
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Figure 3 - Tax Base Across G20 Countries
Italy 28.7
UK 28.5
South Africa 26.5
Canada 26.4
Australia 25.9
France 25.6
Brazil 25.4
Argentina 24.7
OECD Avg. 24.6
Russia 22.9
Germany 22.4
Turkey 21.1
Korea 19.4
China 18.9
US 18.4
Japan 16.5
India 15.5
Mexico 14.5
Indonesia 10.89
0 10 20 30
Total Tax Revenue as Percent of GDP
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that there must be significant local autonomy given and enforcement .
not only on the expenditure side but also on the
Moving to the case of Indonesia, sub-national
revenue side. If local governments do not have the
taxation is regulated by Law 28 of 2009 on regional
power to set tax rates, then their officials cannot
taxes and user charges. There are four provincial
be held fully accountable by voters for the quality
taxes namely 1) motor vehicle tax, 2) motor vehicle
of public services delivered. In addition, it is also
transfer tax, 3) fuel excise tax, and 4) ground
necessary for local councils and chief officers to be
water extraction and use tax. Moreover, there are
elected. Otherwise, they will not be accountable to
seven kinds of taxes for local government, 1) hotel
the local voting population, and the efficiency gains
of decentralization will be lost 20 tax, 2) restaurant tax, 3) street lighting tax, 4)
advertisement tax, 5) entertainment tax, 6) mining
tax for class c minerals and 7) parking tax.
4. Performance of Sub-national Taxes In general, local taxing power in Indonesia
considered weak due to the absence of major
taxes at the local level, even through the piggy-
in general, local Taxing power in backed system. The current fiscal decentralization
indonesia considered weak due To system, through Law 33 of 2004, still emphasizes
The absence of major Taxes aT The on the tax revenue sharing of property tax, land
local level. transfer tax, and personal income tax . While
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the local governments receive certain part of the
respective tax revenue, they do not have authority
From Figure 3, it depicts that a total tax-GDP
in setting tax rate and base. As a result, the local
ratio of Indonesia is around 10.89 percent in 2010.
governments have little room to provide incentive
Indonesia is one of the lowest tax bases among G20
for local investors. Based on Table 5, central
countries well below South Korea (19.4 percent),
government is still collecting and managing major
China (18.9 percent), Japan (16.5 percent) and even
source of revenues from taxes and mining in order
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India (15.5 percent) and Mexico (14.5 percent) .
to support horizontal equalization agenda. Under
Frankly to say that Indonesia performance is at
the current fiscal decentralization law (Law No 33
the bottom whereas Italy performs much better
of 2004), which currently is under revision, central
than all developed G20 countries with figures as
govenment keeps 80 percent of revenue from
high as 28.7 percent. Hence, it can be concluded
Personal Income Tax. Meanwhile, for property tax
that there is an urgent need to expand the tax base
(P2 – urban and rural), central government has
in Indonesia as well as reform tax administration
reliquished its authority to collect to subnational
through enhancement of identification of
government starting in 2014.
properties, valuation, recordkeeping, collection
20. Bahl, Roy, W., 1999, “Implementation Rules for Fiscal 22. City of Barranquilla in Republic of Colombia is able to double tax
Decentralization”, Published of the World Bank, New York. collection between the course of 6-7 years by improving its property tax
21. Current Tax-GDP ratio in Indonesia is about 12.5% however the administration.
number is still below its G20 counterparts. 23. Op.cit, Suhendra and Amir, 2006