RI urged to improve regions' financing capability
RI urged to improve regions' financing capability
Dadan Wijaksana, The Jakarta Post, Jakarta
Improving the intergovernmental fiscal system to enable provinces
and regencies to receive the benefits of the locally generated
revenues is the key to ensuring the long-term benefits of the
ongoing decentralization program, according to a World Bank.
As stated in its newly launched report on decentralization in
Indonesia, the Bank said that "The new intergovernmental fiscal
system has several strong features...(but) there is a lot of room
for improvement."
The report pointed out a number of weaknesses from the current
fiscal system, all resulting from huge imbalances in the
capability of regions to generate their own revenues.
Firstly, there is huge inequality among regions, according to
the most recent data (Dec. 2001) for instance, the revenue per
capita in the richest region is around 50 times more than that in
the poorest one, making it hard for poor regions to deliver the
services even at a standard level.
High dependency by several regencies and provinces on
financial transfers from the central government is another flaw.
Currently, transfers received by some regions account for over 90
percent of their revenue. Such a situation has greatly
contributed to a lack of local accountability, while at the same
time it adds a greater burden to the central government.
A lack of local sources of revenue also exposes further flaws
as it creates justification for local administrations to issue
thousands of dubious regulations for taxes and other bizarre
fees, which have worsened the already deteriorating investment
climate.
The report noted that most regions have been found to issue
all kinds of odd taxes and fees, with at least one tax on the
'import' of goats and an advertisement tax on Coca Cola bottles
just two examples.
To help fix those flaws in the current intergovernmental
fiscal system, the Bank offered a number of solutions; empowering
the local administrations to collect a greater percentage of
property taxes, designing a more equitable general allocation
grant (DAU), developing specific allocation grants (DAK) and
enabling more local borrowing.
The first issue revolves around the need to limit regional
taxation to just a few major, common taxes, while at the same
time giving regions more power to tax based on what is suitable
for each. At present, a particular regency gets only 64 percent
of the land and building tax with rest going either to the
provincial administration or Jakarta.
The report argued that empowerment and greater access to
property revenues was necessary to add to regions' sources of
funds and eliminate incentives for regions to issue ridiculous
taxes that stifled new business and new investment.
For Indonesia, it added, granting more power to local
governments for land and building taxation should be the most
feasible option.
"All around the world, land and building taxes are a local
tax. We feel that having regions decide on the tax rate for this
would be the key to better governance," Bert Hofman, the Bank's
lead country economist, said earlier this week.
However, such a situation could aggravate the already unequal
fiscal system. Therefore a new formula to better balance the DAU
distribution was highly recommended, the Bank said, which
recognizes the imbalance of financial capacity among the wealthy
and poor regions.
To complement those, the Bank also called for the development
of a system on DAK which emphasizes the importance of support for
national priorities, on which regions will also share the
benefits. Included in this priorities should be, among others,
combating poverty and HIV infection.
And finally, the government also needs to enhance the
framework for regional borrowing to ensure that regions borrow
responsibly, and live within their own budget constraints.
The fiscal decentralization reform was launched more than two
years ago to give greater autonomy power to provinces, regencies
and mayoralties in managing their economic affairs. However,
many businessmen have complained about the poor implementation of
program mainly due to the many bizarre rulings issued by the
local governments.
Revenue Sharing (%)
----------------------------------------------------
Item 1 2 3 4 5
----------------------------------------------------
Oil (non-tax) 85 3 6 6 -
LNG (non-tax) 70 6 12 6 -
Mining: land-rent 20 16 64 - -
Mining: royalty 20 16 32 32 -
Forestry: land-rent 20 16 64 - -
Forestry: resource-rent 20 16 32 32 -
Fishery 20 - - - 80
Land & Building Tax 9 16.2 64.8 - 10
Land & Building
Transfer Fee - 16 64 - 20
Personal Income Tax 80 8 12 - -
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1. Central Govt 4. Other local govts
2. Provincial Govt in same province
3. Originating local govts 5. All local govts
Source: The World Bank