7.5 Subnational Taxes

Local Government Organization and Finance: Indonesia 247

TABLE 7.5 Subnational Taxes

Type oftax Level Tax base Cap (%)

Motor vehicle tax Provincial Vehicle value (annual) 5 Motor vehicle transfer tax Provincial Vehicle resale price (annual) 10 Fuel excise tax Provincial Fuel consumption (retail price, excluding VAT) 5 Water excise tax Provincial Water consumption 20 Hotel tax Local Turnover 10 Restaurant tax Local Turnover 10 Entertainment tax Local Turnover (admission price) 35 Advertisement tax Local Advertisement rent 25 Street lighting tax Local Electricity consumption (retail price, excluding VAT) 10 Mining tax for class C Local Market value ofextracted mineralsa minerals 20 Parking tax Local Parking fees 20

Source: Law 34/2000; World Bank 2003; PWC 2005. a. Class C minerals include asbestos, slate, semiprecious stone, limestone, pumice, precious stone, bentonite, dolimite, feldspars, halites, graphite, granite and andesite, gypsum, calcite, kaolin, leucite, magnesium, mica, marble, nitrate, obsidian, ocher, sand and gravel, quartz sand, perlite, phosphate, talc, fuller’s earth, diatom soil, clay, alum, trass, yarosite, zeolite, basalt, and tracite.

In addition,article 2 ofLaw 34/2000 states that local governments have the right to impose new local taxes as long as those taxes comply with eight general “good tax”principles:

They are taxes,not user charges. The tax base is located in the region and immobile. The taxes do not conflict with public interest. The tax base is not subject to provincial and national taxation. The revenue potential is adequate. The taxes do not exert economic distortions. Equity concerns are taken into account. Environmental sustainability is taken into account.

In addition,Law 33/2004 prohibits local governments from establishing own-source revenues that impose high costs on the economy or restrict the mobility ofpeople and goods and services across internal borders or constrain international imports and exports.This provision was introduced in reaction to the imposition oftaxes on interjurisdictional trade by some local governments (Ray 2003).The right to impose new taxes and user charges is

248 Sebastian Eckardt and Anwar Shah

a new subnational authority introduced by Law 34/2000;it was accompanied by fears ofmushrooming local taxes.To prevent the issuing ofa plethora ofsubnational charges and taxes,the law requires review and retrospective approval by the national government.12 The oversight function resides with an interministerial review team from the Ministry ofHome Affairs and the Ministry ofFinance.

Lewis (2003b) reports that 916 bylaws on local taxes were enacted in FY2000 to FY 2002.Ofthese,406 were reviewed by the national government,and 113 were rejected on the basis ofthe outlined criteria.13 The government is preparing a revision ofLaw 34/2000,which apparently includes a list oflocal taxes and user charges,to reduce the administrative burden ofthe review process and to prevent inefficient taxation practices.

Accountable local governance requires that local governments be largely self-financed,so that tax burdens and the benefits oflocal services are obvious to local residents.Iflocal tax rates are flexible,they can signal the costs oflocal services,at least at the margin,and local residents can choose the level ofservices they desire.At the same time,residents face greater incentives to monitor performance ifservices are directly funded from their tax payments.However,in Indonesia,the potential for local governments to raise own-source revenue remains weak under the current legislation.To raise additional revenues,local governments resort to inefficient taxes and charges with small revenue potential and high administrative costs,thus contributing to economic distortions (Ray 2003).

For local accountability to take root,among the most critical issues in the reform ofintergovernmental fiscal relations are broadening the local tax bases and reducing the dependence ofregional governments on transfers. Two specific reform proposals are under discussion.The first proposal is to assign land and property tax to local governments.Property tax is an obvious candidate for decentralization,because most ofthe revenue already accrues to regional governments under current sharing arrangements (Kelly 2004;Lewis 2002b;Shah and Qureshi 1994).Moreover,taxes on land and property are particularly well suited as subnational taxes because they are immobile and represent important sources offinance for subnational governments in many tax systems.The second proposal is to give regional governments the option oflevying a supplementary rate (for example,up to five percentage points) on the national tax base for personal incomes,with central collection ofthe supplementary tax (Ahmad and Krelove 2000;Shah and Qureshi 1994).In the medium term,these proposals will not be put into practice,because the revised Law 34/2000 does not devolve significant tax authority to the local level.