Local Taxation in Indonesia: Opportunities for Reform

Abstract

The Indonesian Government has recently completed a major reform of national taxation; an obvious follow-up is the reform of local taxation. Provinces and kabupaten/kotamadya levy a wide range of local taxes, but with the exception of provincial taxes on motor vehicles, these are mostly small, inelastic and costly to collect. In addition, many have undesirable equity and efficiency implications. This paper analyses the present range of local taxes in terms of a set of criteria, and discusses such issues as local fiscal performance, the effect of multiple taxes, and taxation versus charging. The paper concludes with a review of the options for reform aimed not only at simplifying and improving local taxation, but also at reducing local government's dependence on central government grants.