Page 6 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)
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DDTC Working Paper 1015

                                                                    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.
                                                                                      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
                                                                France, India, Ireland,
                    Rental value  Value in current use  Net rental income  Morocco, Pakistan, United   In Hungary, set by local government.
                                                                                      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
                   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).
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