Reining in Regional Governments? Local Taxes and Investment in Decentralised Indonesia

Abstract:     
In 2009, Indonesia’s national parliament enacted Undang-Undang Nomor 28 Tahun 2009 tentang Pajak Daerah dan Retribusi Daerah [Law No 28 of 2009 on Regional Taxes and User Charges] (‘2009 Law’). According to Indonesian President Susilo Bambang Yudhoyono, this statute was enacted to address concerns that Indonesia’s regional governments were harming the investment climate, particularly by enacting ‘problematic’ regional regulations. Business groups had long complained about provincial, district and city parliaments and executive officials misusing the lawmaking powers granted to them under post-Soeharto decentralization reforms. They were, for example, enacting laws imposing onerous taxes on trade, and imposing user charges for services that were unnecessary or not provided. Some commentators had even claimed that some of these imposts were prohibited by national law and were, therefore, illegal. We argue that the 2009 Law is unlikely to improve Indonesia’s investment climate for three primary reasons. First, the Law does not effectively restrict the types of taxes that regional governments can impose; its definitions of permissible imposts are broad, particularly in respect of user charges. Second, some local lawmakers are testing the outer limits of their powers under the 2009 Law. We show this using the case of a regional regulation from West Sumbawa, in which imposts are labelled ‘commissions’, apparently in an attempt to avoid the statute’s restrictions. Third, we argue that it is likely that a large portion of new local tax laws will simply not be reported to the national government, meaning that even those regional taxes that clearly breach the 2009 Law might ‘slip through’.

Number of Pages in PDF File: 17

Keywords: Indonesia, decentralisation, law, tax, local government

JEL Classification: K10, K30, K34

Accepted Paper Series