Realigning local taxes

Realigning local taxes

Many officials will lose significant sources of personal,
though illegal, incomes when the bill on local taxes and
retributions (user tax and user fees) comes into force sometime
next year. But the new legislation will surely contribute to
strengthening the fiscal system of local administrations, notably
the subnational government at the regency level, which has been
designed to function as the bastion of local administrative
autonomy.

The bill will realign and redefine the kinds of taxes and
retributions that can be collected by local administrations at
the provincial and regency levels. It was one of the four bills
on tax matters which were submitted to the House of
Representatives last week.

A cursory reading of the draft legislation might lead to the
conclusion that local administrations would lose a large amount
of income because the bill will abolish many local taxes and
retributions. That, however, will not be the case. True, a large
number of taxes and fees currently imposed by local
administrations will be abolished. But, as Director General of
Taxes Fuad Bawazier has often acknowledged, quite a number of the
local taxes have so far served more as illegal sources of
personal income for officials. The potential revenue from many
categories of the taxes have been so insignificant that the
authority to collect them has often been abused by officials to
line their own pockets.

Moreover, as businessmen in the provinces have often
complained, the legal basis and economic rationale for the
collection of local taxes or user fees is often questionable.
Local taxes are supposed to be mandated by local legislation
enacted by the regency or provincial legislature. In reality,
though, numerous kinds of local taxes or user taxes and fees have
mushroomed and many of them have been mandated simply by decrees
of a regent or governor. No wonder investors have been
complaining a lot about the invisible costs of doing business in
the country.

The bill will realign all those local taxes and levies,
meaning that their number will be slashed. But the bottom line
will still be a larger income for local administrations, because
the smaller number of taxes will be imposed on the economic
sectors with the biggest potential to generate revenue.

Provincial administrations will be empowered to collect only
three kinds of taxes: tax on motor vehicles, tax on the transfer
of motor vehicle ownership and tax on gasoline. The latter will
be a completely new tax to be imposed on gasoline sales. Regency
administrations will be authorized to collect only six kinds of
taxes: taxes on hotels and restaurants, entertainment services,
advertisements, street lighting, quarried minerals and ground
water.

Another bill concerning tax on the transfer of land and
building ownership, which was also unveiled to the House last
week, will become another major source of income for local
administrations. Unlike the tax on land and buildings, which is
collected annually, the new one will be collected on the basis of
transactions.

There are, we think, several other benefits from the new
bills, in addition to the generation of larger tax receipts to
local administrations. The new legislation will give a stronger
legal certainty to the taxpayers, because the objects of taxes
are clearly defined and the rates are clearly set. The central
government, apparently with a view toward providing a broader
leeway for local creativity and initiatives, does not set fixed
rates for the local taxes, but sets only the maximum rate for
each of the nine local taxes.

But the most significant impact with regard to the development
of local administrative autonomy will be the big stimulus for
local administrations to take more initiatives toward bolstering
economic activities in their respective areas. Since the full
income potentials of the six local taxes can only be realized
under robust economic expansion, local administrations will be
encouraged to be more aggressive in promoting investments and
more friendly in treating businesses in their respective areas.