Page 7 - Working Paper (Fiscal Decentralization and Sub-national Taxes: Specific Case of Indonesia)
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DDTC Working Paper 1015

                   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
                   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
                   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
                   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
                   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)
                   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
                   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.
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