With a comprehensive database of real property registration and information, land and building taxes have the potential to boost local governments' revenue collection. Photo credit: ADB
Indonesia has one of the lowest tax revenue collection rates in Southeast Asia. Its tax to gross domestic product (GDP) ratio is at 11.5% as of 2017 against the 15% needed to be able to sustain economic growth and fight poverty.
Improving tax collection has become more urgent in the wake of the coronavirus disease (COVID-19) pandemic to ensure that public goods and services, including healthcare, are delivered to Indonesia’s citizens.
A project supported by the Asian Development Bank has helped improve tax collection by an average of almost 37% between 2015 and 2018 by modernizing local government taxation and policy improvement.
The project analyzed the challenges in raising local tax revenue, worked with the Ministry of Finance on needed regulatory amendments, and tested several strategies to modernize tax administrations in four pilot areas: Badung, Bali; Balikpapan, East Kalimantan; Bandung, West Java; and the Special Capital Region of Jakarta.
Indonesia requires local governments to raise a greater portion of their revenue from local sources. However, it has been a challenge for local governments to raise revenues from local taxes. In 2012, the ratio of local government tax to GDP stood at 1.1%. By 2018, it had reached only 1.3%.
The report found the principal law governing the raising of local-source revenue “wanting.” Parts of it are out of date, and the tax base is too narrow. The law also imposes taxes in ways that are not compatible with the funding needs of local governments.
While there have been attempts to amend the law to offer more streamlined and coherent legislation on the imposition of local government taxes, progress in the House of Representatives has been sluggish. Motor vehicle tax and taxes on certain goods and services, land and building taxes, taxes on natural resources, and surcharge on tobacco excise tax and personal income tax are among the taxes the report said could increase revenues.
But the project highlighted that local governments can still boost their revenue by upgrading their tax administration to modern international standards.
Challenges
The report noted the lack of comprehensive cadastre or real property database as among the challenges facing local governments. Despite the merits of property taxes, Indonesia collects relatively little of them by international standards.
There were also deficiencies in local governments’ information technology or IT systems. Two common problems are weak data governance in tax administration and the poor integration of information systems into a single tax IT system. Local governments also lack online filing of self-assessment returns, which is standard practice in modern tax administrations.
The report also found that local governments differed in their degree of commitment in introducing tax reforms, which significantly affected progress. It cited frequent changes in leadership, prioritizing short-term revenue targets over improving fundamental aspects of tax administration for more sustainable revenue gains over the long term, reluctance to take ownership of reform, and low employee engagement.
Administrative mechanisms and practices were also found to be deficient, with tax enforcers having “a capability deficit” in tax administration. The Special Capital Region of Jakarta, being the most prosperous local government and the best located to attract skilled employees to handle tax administration tasks, was not as constrained compared with poorer regions, which do not have the resources to hire and retain skilled employees.
In addition, commitment to tax reform varies among the local governments, with reluctance often due to individual resistance to change.
Solutions
During the project’s implementation, the project provided training and practical assistance to enhance the breadth, depth, and reliability of the pilot local governments’ property databases; raised the standards of their information technology systems; and improved their tax administration organizational structures and business processes. These improvements ultimately resulted in increased tax collections.
To help improve real property databases in the four pilot areas, the project deployed drones and other technologies to map out land and buildings and to update property records. The project also incorporated training in data collection planning through mapping and field surveys, quality control over collected data, training in fiscal cadastre mobile applications, the production of a fiscal cadastre technical manual, and supervisory support—all intended to enable local governments to collect fiscal cadastre data independently.
To help upgrade IT systems, the project developed medium-term IT blueprints, both general and specific, for the four pilot governments. The blueprints are based on gap analyses, which generated recommendations for system design and road maps for implementation.
Local governments used the IT gap analysis as a guide to plan their IT system investments and budgets, as well as their IT development and implementation. Balikpapan, for instance, allocated a budget for IT development based on the project’s IT blueprint and gap analysis. The project found Balikpapan lacked ICT experts who could design and maintain IT systems, with only one temporary employee performing the tasks.
The gains made and lessons learned through the project show viable solutions that other local governments across the country can adopt.