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.