The new law on regional taxes and user fees approved by the parliament Tuesday is much better than its predecessor (Law No. 34/2000) because it stipulates more clear-cut provisions on what types of taxes and user fees regional governments are authorized to impose and on the distribution of tax and fee receipts among provincial, regency and city administrations.
Unlike the old law, which is vulnerable to misinterpretation, the new legislation is more clearly defined with regard to the division of taxing power between the provincial, regency and municipal governments. Over the past seven years, the central government had amended or annulled 1,065 regional bylaws and most of them were related to regional taxes and levies. The bylaws had been revised or canceled outright because they contradicted higher laws or were inimical to investment.
The new law stipulates 16 types of taxes and user fees regional administrations are authorized to impose but many of them are not completely new. Eleven of them are authorized for regency and city governments where local autonomy is anchored, with the other five mandated for provincial administrations.
The legislation does not fix a single rate for many regional taxes, but instead provides a range of rates, on a progressive basis, regional administrations can choose to suit local economic conditions.
The provincial administration of Jakarta, for example, is authorized to set the tax on each additional private motor vehicle for a single owner at a maximum rate of 10 percent to stem the car population growth in order to reduce traffic jams. But other provincial administrations can set the motor vehicle tax at a maximum rate of 2 percent, irrespective of the number of vehicles owned by a single individual or institution/organization. Based on the same thought process, parking fees for motor vehicles are set at a maximum 30 percent.
The enforcement of the new law will most likely be smoother because of the ample time given to regional administrations to prepare bylaws and institutional capacity to administer the taxes and to make adjustments for the impact of the local taxes.
The stipulation on regional tax on cigarettes, set at 10 percent of the central government-mandated excise tax, will be enforced only in 2014 to give adequate time for cigarette factories and tobacco farmers to make adjustments to cope with the expected fall in cigarette sales.
Likewise, the provision on property tax in urban and rural areas will be enforced only in 2014 to allow regional administrations to prepare their institutional capacity to administer this tax which is now managed by the central government. Yet the biggest benefit of the new law on regional taxes and user fees is not primarily the amount of revenues that can be collected, but the incentives provided to regional administrations to develop local economies.
This is because the amount of revenue that can be collected from the regional taxes is directly related to the development of the local economy. For example, receipts from regional taxes on hotels, restaurants, parking, advertisements, motor vehicles, fuel, entertainment and properties (land and buildings) are all positively correlated with the stage of the development of the local economy.
The strong and clear taxing power invested by the new law in provincial, regency and city administrations is really a great incentive for them to develop their local economies.