Page 12 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)
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DDTC Working Paper 1015

                   creates  incentives  that potentially undermine   Property Tax P2 (Pajak Bumi dan Bangunan untuk
                   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
                                                                    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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