Regions to receive higher revenue under amendment to fiscal balance law

Dadan Wijaksana, The Jakarta Post, Jakarta

As mandated by the People's Consultative Assembly (MPR), the government is now in the process of drafting a revision to the existing law on intergovernment fiscal balance, which will allow regional governments to obtain higher revenues to finance their economic development programs and greater administrative power.

As the drafting of the bill is still in its early stages, it remains unclear as to when the bill would be proposed to the House of Representatives for deliberation.

Bambang Soedibyo, a former finance minister and member of a team of experts assigned to conduct a preliminary review on the matter, said he expected the team to complete the drafting in October.

"But I cannot disclose much, because the process (of drafting) is still ongoing," Bambang told The Jakarta Post, adding the whole process was made possible by a mandate from the MPR to give more funding allocations to regional governments.

The revised law is expected to become effective by early 2004.

If the bill is approved by the House, regional administrations will obtain a greater revenue share from natural resources and also a bigger funding allocation from the central government's state budget, according to Kontan economic weekly.

Revenue obtained from natural resources like oil, gas, forestry and others are split between the central government and the producing regions under a revenue-sharing formula.

According to the current fiscal balance law, oil and gas producing-regions get a 30 percent revenue split from gas, and 15 percent from oil. But under the proposed changes, the revenue portion of the regions from gas would be increased up to 40 percent, the weekly said, quoting a source. The revenue portion from oil would also be raised.

Revenue from non-mining resources like forests and fisheries, of which 80 percent is allocated for the producing regions, will also be increased.

Regional governments also receive funding allocations from the state budget namely: the general allocation fund, popularly known as DAU and the specific allocation fund or DAK. According to the law, the state budget must allocate 25 percent of revenue for DAU.

The revision will also lead to an increase in the allocation of these two funds. For DAU, the increase might be between 5 percent and 10 percent.

DAK would also be boosted, but an exact figure is not available as yet.

For 2002, the state budget has allocated Rp 69.1 trillion (around US$7.6 billion) and Rp 817 billion for DAU and DAK, respectively.

The intergovernment fiscal balance law is part of the regional autonomy policy launched by the government in 1999 to give provincial and regency administrations a greater role in managing their affairs. To finance the bigger administrative role, the regional governments need huge funds. But so far, many local governments have said that the revenues obtained both from natural resources and the state budget are far from sufficient.

As appealing as the new plan may seem, it will all come at a price. To cope with that, the government will again turn to the taxpayers, by jacking up revenues from taxes, especially income tax. This may lead to a higher income tax rate.

Currently, tariffs for income tax are divided into five classes: 5 percent for those with annual incomes of less than Rp 25 million, 10 percent for individuals whose incomes stand at between Rp 25 million and Rp 50 million, 15 percent (Rp 50 million to Rp 100 million, 25 percent (Rp 100 million to Rp 200 million) and 35 percent (more than Rp 200 million).

However, as many taxpayers are still struggling to fully recover from the impact of the prolonged economic crisis, such ambitious target would be too good to be true.

In fact, the government's proposal in the 2003 draft state budget to increase revenue from income tax has drawn criticism from many, arguing it would hurt both the business sector and the purchasing power of the people.

When confronted with this, Bambang declined to comment, saying everything had not been finalized and that deliberation would still continue.