New law to bring issuance of local taxes into line
Urip Hudiono, The Jakarta Post, Jakarta
The government, in another effort to improve the country's investment climate, has completed a new bill prohibiting regions from arbitrarily imposing local taxes.
The draft regional tax and user charges law, which was submitted to the House of Representatives for deliberation last month, also strictly regulates existing local taxes, particularly on their maximum rates.
"The law is expected to close any loopholes for regions to issue other `problematic' taxes," head of the Finance Ministry's Economic, Financial and International Collaboration Studies Agency (Bapekki), Anggito Abimanyu, said Wednesday.
"We therefore expect it to help improve the investment climate as well, because we know such taxes have been the main discouragement for investors."
Anggito explained that local administrations would no longer be able to impose local taxes or user charges without providing the legal basis for them through related local regulations.
The regulations must be submitted to both the Finance Ministry and Home Ministry for review and approval, with the central government having the right to impose sanctions on local administrations refusing to revoke taxes deemed unfit or with higher rates than the new law allows.
"Sanctions will be related to a region's general allocation funds," Anggito said, referring to the funds allocated to local administrations from the central government's annual state budget.
Anggito said the bill also would try to strike a balance in maintaining adequate local revenue for the regions, with high revenue-generating taxes on motor vehicles and street lighting still allowed.
"A new environmental tax also will be introduced, while certain taxes, such as the underground water tax, will be delegated from the provinces to regencies and city administrations," he said.
According to a draft of the law obtained by The Jakarta Post, the tax on automobiles will be reduced from the current 5 percent to between 1-3 percent, with items of trains and heavy equipment, among others, exempt from taxes. The underground water tax is set at a maximum 20 percent and the environment tax at 0.5 percent of production costs.
The Home Ministry revoked last month 537 out of a 5,054 local regulations submitted for review by the Finance Ministry. The total regulation reviewed is, however, still only 37 percent of the 13,520 regulations issued by 30 provinces and 370 regencies throughout the country.
The business community has long complained about local taxes and user charges imposed on them after the introduction of the autonomy law in 1999, which has fueled a high-cost economy.
The World Bank's recent Doing Business in 2006 report puts legal uncertainty resulting from regional autonomy -- including a surfeit of local taxes and user charges -- among the top factors discouraging investors.
The central government also faced difficulties in setting a time frame to review and annul controversial bylaws deemed controversial.