The Role of Property Tax in Fiscal

Decentralization in Indonesia*
Mukul G. Asher **
Abstract
Indonesia has embarked on a decentralization process with potentially far reaching
implications for its fiscal system and political economy. This paper examines the role of
property tax in fiscal decentralization in Indonesia. Currently, the property tax is essentially
a central tax as far as design, valuation, collection (target based), and administration are
concerned. The net revenue is fully shared with provinces and districts, though the basis
of sharing is not fully transparent. This paper suggests that in order to increase the share
of own-revenues of the regions, policymakers may consider permitting greater discretion
to districts to set effective property tax rates, within the overall limits set by the central
government. It is suggested that centralized administration be retained. Transforming
property tax into a truly local tax, including local responsibility for valuation, is not
currently recommended, but could be kept as a key long-term goal.

1. Introduction
Until the 1997 East Asian crisis, Indonesia experienced rapid growth
over a prolonged period under an autocratic political structure and
highly centralized fiscal system.1 The old political structure however,
did not survive the crisis, and the country is now gradually becoming
accustomed to a multi-party democratic system. Beginning with the
2004 elections, the president will also be elected through a direct popular vote. The role of local level legislatures has increased as a result of
decentralization; and they will therefore have much greater impact on
the country than in the past. The general expectation is that democracy will lay a more solid and sustainable foundation for broad based
economic development in Indonesia, and will be better able to mediate conflicts among different regions and groups.
As political power becomes more diffused resulting in multi-centric power structure, an ambitious program of decentralization is being implemented, with potentially far reaching implications for the Indonesian polity and the fiscal system (Sidik and Kadjatmiko 2002;
Ahmad and Mansoor 2002; Alm, Aten and Bahl 2001). The two seminal laws on decentralization, Law Number 22/1999 on Regional

The Role of Property Tax in Fiscal Decentralization in Indonesia - 27

Government (UU PD), and Law Number 25/1999 on Fiscal Balance

between the Central Government and Regions (UU PKPD) came into
being in 1999. These laws and their implementing regulations envisage rapid and major correction of the anomaly that in spite of satisfying conditions of decentralization such as large population (210 million in 2001), land area (1.94 million sq kilometer spread over nearly
17,000 islands), diverse population, and regional inequalities in development, its fiscal system until 1999 was among the most centralized
(Alm, Aten and Bahl 2001).2
Indonesia is witnessing transfer of a significant degree of fiscal
power and responsibility from central to the lower levels of government (comprising 31 provinces, 410 districts, about 4000 Kecamantan,
and nearly 70,000 villages as of early 2003). Decentralization appears
to have provided fiscal and other incentives to form new units of government (Asanuma and Bambang 2003). This could complicate coordination among various local governments as the externalities, economies of scale and scope, and spillover effects tend to vary for different
activities, and therefore may not coincide with political boundaries.
Decentralization has also permitted experimentation with different
organization structures of local governments, making comparative
analysis more difficult (Matsui and Kuncoro 2003).
Law No 22/1999 on Regional Government (UU PD) retains the
hierarchical relationship between the central and the provincial governments, but abolishes it between the provinces and districts governments (municipality or Kotamadya, and regency or Kabupaten). Heads
of the district government (mayor or walikota, and district head or
bupati) are now responsible to locally elected assembly. This law defines local government functions as a negative list that excludes functions of national interest and functions spanning more than one district that are assigned to provinces. Kabupaten and Kota are now responsible for such key public services as health, education, environment, and local infrastructure. There have been recent attempts (Under Presidential Decree No 5 of 2001) to define the functions of local
governments more explicitly, i.e. as a positive rather than a negative
list (Sidik and Kadjatmiko 2002, 9-10).
Since 2001, over 16,000 public service facilities and the responsibility for about two million civil servants have also been transferred

28 - Mukul G. Asher

to the regions (IMF 2002, 72). The transfer of civil servants raises
issues about their pension and health benefits which appear to have
been given relatively little attention. The expectation appears to be
that the central government will continue to bear those costs, at least
for the existing employees. It would be useful to clarify this issue.
The transfer of two million employees however, has occurred
without any significant disruptions to the service delivery. One of the
reasons may be that the majority of the employees were already physically located at local and regional levels. This suggests, at least according to one study, that concerns that local governments would be
unprepared for such transfers were overstated (Silver, Azis and
Schroeder 2001, 346). The broader issues of capacity of local government to choose expenditure projects and implement them effectively;
and the possibility of political shifts at the centre leading to at least
partial reversal of the substance of decentralization process, remain
however (The Economist, February 15, 2003, 28-29).
The second seminal law (Law No 25/1999), which revamps intergovernmental fiscal transfers, concerns fiscal balance between the central government and the regions. This has led to new system of tax
sharing, two intergovernmental grants,3 and Kabupaten and Kota (but
not provinces) being permitted to levy their own taxes through local
by-laws if they get central government approval (Sidik and Kadjatmiko
2002, 2). The criteria for these taxes are based on Law No 34/2000
(Law on Local Government and User Charges) which replaced Law
No. 18/1997. The criteria range from political acceptability at both
regional and national levels, to consistency with environmental and
conservation needs, to not damaging the local economy (Sidik and
Kadjatmiko 2002, 14). 4
Local tax proposals are submitted to the national government,
and are reviewed by both the Ministry of Home Affairs and Ministry
of Finance. However, if there is no objection after one-month, the
proposals can be automatically implemented. Such a short time, combined with lack of expertise in evaluation of the proposals has meant
that a significant number of inappropriate taxes have been implemented.
Regional governments are however, not permitted to borrow as
this may adversely affect the ability of central government to conduct
macroeconomic policy. For large capital projects, such as mass transit,

The Role of Property Tax in Fiscal Decentralization in Indonesia - 29

mechanisms need to be evolved to enable borrowing. At a future stage

regional governments may be encouraged to prepare their fiscal accounts to be rated by credit rating agencies, and be permitted to borrow domestically subject to guidelines. Foreign borrowing, including
from multilateral institutions, should however continue to remain the
exclusive prerogative of the central government.
Table 1
Estimated Proportions of Regional Budget Revenue by Main Category, FY 2001
(Percentages)
DKI

Kota

Kab

Overall

30

15

15

Shares of 24
national
revenues

56

22

19

22

Grants

32

14

63

76

63

Total

100

100

100

100

100

Local
revenues

Provinces(excl
DKI)
44

Note: Indonesias fiscal year was changed from April March to calendar year in 2000.
Source: Sidik and Kadjatmiko 2001.

Table 1 provides estimates for 2001 of the extent to which regional

governments derive budgetary revenue from different sources. The
importance of each source varies among different types of regional
governments. Overall, 63 percent of regional government revenues in
2001 were grants from central government; 22 percent from the share
of national revenues; and only 15 percent from own sources. In provinces however, the share of local revenues was 44 percent, while in
Kabupaten it was only 5 percent. In DKI (Jakarta), the share of national revenue was as high as 56 percent. The above figures suggest
very high degree of revenue dependence on the central government by
the regional governments.

30 - Mukul G. Asher
Table 2
Proportion of Sharing of State Revenue before and After Law of Financial
Balance (Percentage)
After

Before
Provinces

Districts

Central

Provinces

Districts

Local
Government
equal share

10

16.2

64.8

16.2

64.8

10a

20

16

64

16

64

20

Natural Resource
Revenue
Forestry: IHPH

55

30

15

20

16

64

Forestay:
PSDH

55

30

15

20

16

32

32

Mining: Land
Rent/ Iuran Tetrap

20

16

64

20

16

64

Mining: Royalties
Fisheries
Oil
Gas

20
100
100
100

16
-

64
-

20
20
85
70

16
3
6

32
6
12

32
80
6
12

Income Tax
Income Tax
(Non oil)

100

80

12

Revenue Types

Property Tax
Land and Building
Tax (PBB)
Charge on Transfer
of Land and
Building (BPHTB)

Central

a. The centre keeps 9 percent of the PBB revenue as collection fee. Nil
Source: Adapted from Sidik and Kadjatmiko, 2001

Table 2 shows revenue sharing arrangements for property tax (PBB

and BPHTB), natural resources, and personal income tax. The reduction in the central governments share of revenue from natural resources
is particularly noticeable. This may create horizontal fiscal imbalances
among the resource-rich and resource-poor provinces and may lead to
volatility in budgeted and actual revenues (Ahmed and Mansoor 2002,
11). The concern is that districts in resource-rich provinces may not
give due weight to economic efficiency in choosing local projects; while
districts in resource-poor provinces may resort to undesirable revenue
raising measures (The Economist, February 15, 2003, 28-29).

The Role of Property Tax in Fiscal Decentralization in Indonesia - 31

It is in the above context that this paper analyses the role of the
property tax (PBB and BPHTB) in fiscal decentralization in Indonesia.
The rest of the paper is organized as follows: Section 2 analyses
the nature and structure of property tax in Indonesia. Section 3 analyses the role currently assigned to property tax in fiscal decentralization, and section 4 provides the concluding observations.
2. Nature and Structure of Property Taxation
Even before the Dutch colonization of Indonesia, land tenure systems existed under various kingdoms and village authorities. These
systems varied from kingdom to kingdom. During the Dutch rule, tax
on property was imposed as a tax on land, which was assessed by the
village authorities. A land rent system was developed in 1811 using
the principles of Indian property tax system developed by the British
at that time. In this system, land rent was applicable to individual landowner. Due to resource constraints, this system was not enforced for a
long time. As a result, old system of assessment by village authorities
continued until 1872. Revised land rent system, based on the British
principles, was enforced after the enactment of 1872 Land Rent Act
(Rachmany, 2000).
The modern property tax dates back to 1986 when as a part of
comprehensive tax reforms initiated in 1983, Land and Building Tax
(PBB) was introduced (Asher 1997; Gillis 1989). Before the PBB, taxes
relating to property were levied under seven separate ordinances. The
IPEDA (Iuran Pembangunan Daerah or contribution for Regional Development), and net wealth tax were the most important property taxes.
IPEDA was levied on the net proceeds from land classified into
five sectors- forestry, estate (private and state), mining, rural (rice and
non-rice), and urban. The basic nominal rate was 0.5 percent of the
proceeds from land in the rural sector and 1 percent of capital value in
urban sector. Rural non-forestland and estates were subject to progressive taxes. IPEDA liability on forestland was set at 20 percent of
logging royalties, whereas tax liability for mining land was decided by
negotiation. Because of uneven enforcement, ad hoc exemptions, and
a 50 percent exemption for residential property, effective rates were
much lower, and varied widely even for the same property class. The
collection cost of IPEDA and related taxed was high. In 1986,

32 - Mukul G. Asher

property tax revenue was Rp 190 billion, 1.4 percent of total tax revenue, equivalent to only 0.20 percent of GDP (Asher 1997, Table 4.2,
132-133).
The PBB is levied on sales value (or capital value) of land and
building and not on rental value as previously. The tax liability is defined broadly to cover either the owner and / or the user (beneficiary)
of land and/ or building. This ambiguity is designed to facilitate tax
administration as property titles records are not always complete (Kelly
1995; Rosengard 1998). The PBB expanded the tax base by shifting
from rental to capital values by drastically reducing exemptions, and
by greater focus on tax collection5 (Rachmany 2000; Rosengard 1998).
.
The initial intention was to undertake property valuation every three
years, except in those areas of rapid development, where the assessments were to be more frequent. At the same time, tax administration
has been given flexibility to choose the valuation technique for all
properties except unique, high value properties. This system uses similar land value zone approach under which land value books are used
for land, and building classification system used for buildings (Kelly
1995; Rosengard 1998).
The land values are determined by tax department in close consultation with local authorities, and approved by regional head
(Rosengard 1998). The tax authorities have been refining the valuation techniques through special studies of sales and assessments. For
valuing buildings, cost tables determined by the tax department are
used. The total property value is the summation of land and building
values. Special techniques are used for mining, estates, and other properties.
The values used in classifying land and buildings are updated from
time to time. The most recent system (in force in early 2003) classifies
land into 100 classes, and buildings into 40 classes, with each class
having a unit market price and assessment value. The assessment value
per sq metre of land ranges from Rp 14,000 to Rp 68.5 million while
for building it ranges from Rp 50,000 to Rp 15.2 million. An initial
maximum exemption (called non-taxable value of the property) of Rp
12 million has been granted for buildings since 2001, but the regional
and local governments have been given discretion to set their own
threshold level of exemption. There is no exemption granted for land.

The Role of Property Tax in Fiscal Decentralization in Indonesia - 33

The reason appears to be de-facto use of property tax record as evidence of land ownership.
Determining the Tax Liability
The tax rate on all properties throughout Indonesia is set by national
law at 0.5 percent. Local governments do not have discretion in setting the rate. This rate is applied to the tax base defined as the capital
(sales) value estimated according to method described above, times
the assessment rate (or ratio), less value of exemption. The assessment ratio can range from 20 to 100 percent. In 1986, nationwide
assessment ratio was set at 20 percent. In 1994, this was raised to 40
percent for high value urban properties over Rp 1 billion while in 2000,
the 40 percent rate was set for all urban and rural properties over Rp 1
billion, and for all properties above 25 hectares within the forestry and
estate sectors. All other properties have the assessment ratio of 20
percent. The effective legal rate thus ranges from 0.1 to 0.2 percent 6
(Assessment ratio x tax rate). Thus, the PBB tax liability is determined
by the following equation:
PBB Tax Liability = [(Assessment Value of Land per sq meter X area X assessment
Ratio) + (Assessment value of Building per sq meter Area Assessment Ratio)
Value of Exemption] 0.5
(1)

Charge on Transfer of Land and Building (BPHTB)

This charge is the second component of the property tax in Indonesia,
and was enacted in 1997. The current tax rate is 5 percent of the
acquisition value of the property less a deduction of the maximum
of Rp 60 million. Regional governments are permitted to determine
the deduction subject to the above maximum. The deduction for the
intra-family transaction is Rp 300 million.
The rate of transfer tax is thus considerably higher as compared
to the PBB. The BPHTB has the potential to generate considerable
revenue, especially from urban properties, provided effective steps are
taken to ensure high compliance. Large differential rate of tax between
PBB on the one hand and BPHTB on the other however may complicate this task. In general, the effective rate of PBB will need to be
increased, and of BPHTB decreased.

34 - Mukul G. Asher

Revenue Level and Composition

The revenue importance of the property tax has increased significantly
since the introduction of PBB. Thus, by 1996-97, revenue from PBB
had increased to Rp 2.41 trillion, equivalent to 2.4 percent of the total
tax revenue (www.bps.go.id) as compared to 1.4 percent of total tax
revenue just before the PBB was introduced.
With the introduction of the BPHTB in 1997, the revenue importance of property tax on a provisional realization basis increased to
Rp 6.29 trillion in 2001, equivalent to 3.40 percent of the central government total tax revenue, 2.18 percent of domestic revenues, and
0.42 percent of GDP (Bank Indonesia 2002, Table 1, 236; Table 31,
265). The 2002 budget projects property tax revenue of Rp 8.13 trillion, equivalent to 3.7 percent of tax revenue, 2.69 percent of total
domestic revenue, and 0.48 percent of 2002 GDP of Rp 1685.4 trillion assumed in the budget (Bank Indonesia 2002, Table 7.8, 115;
Table 31, 265)7. Thus, the share of property tax as percent of GDP is
now nearly two and half times the 0.20 percent of GDP obtained in
1986. This is a positive development suggesting success in mobilizing
resources from this source.
The property tax authorities set collection targets down to district level. Little information is however available on the process of
target setting, monitoring, and incentives (disincentives) for over (under) achieving the targets. The property tax arrears are believed to be
Rp 2.5 trillion (about a third of total property tax revenue) in mid2002. A strategy is therefore needed to reduce the arrears.
The revenue sharing however is on actual realization basis. The
shares allocated to provinces and to districts are explicitly stated (Table 2). The allocation of PBB revenue among districts is roughly based
on 80 percent from the total of current year tax bills and 20 percent
from the total tax arrears. The allocation of BPHTB revenue among
districts is roughly based on actual revenue from previous years and
prediction of transfer of current year.
A significant proportion (more than two-fifths) of the property
tax revenue is from mining sector (Table 3). In the mining sector, oil
and gas producers account for a large proportion of property tax revenue. The traditional practice has been to use state oil company,
Pertamina, as an intermediary between the oil and gas producers and

The Role of Property Tax in Fiscal Decentralization in Indonesia - 35

property tax authorities. Pertamina thus made a single property tax

payment on behalf of all the producers. This arrangement provides
some discretion to the authorities. Perhaps it is this discretion, which
permits use of property tax for equalization purposes. It may be useful
to consider instituting direct property tax payment by each oil and gas
producer to the tax authorities.
Composition of Property Tax Revenue
The following observations may be made based on data on the composition of property tax revenue for 2000 and 2001 provided in Table 3.
Table 3
Indonesia: A Breakdown of Property Tax Revenue, 2000 and 2001
Property sector
Total
Rural
Urban
Plantations
Forests
Mining
Charge on
Transfer of Land
& Building a

Amount
(Rp. billion)
4484.1
(100.0)
267.4 (6.0)
1084.2 (24.2)
198.8 (4.4)
132.4 (3.0)
1879.3 (41.9)
922 (20.6)

2000 b
% Tax % GDP
revenue
3.87
0.35
0.23
0.94
0.17
0.11
1.62

0.02
0.08
0.02
0.01
0.15

0.80

0.07

Amount
(Rp. billion)
6712.2
(100.0)
322.2 (4.8)
1712 (25.5)
244.8 (3.6)
169.8 (2.5)
2838.2
(42.3)
1425.2
(21.2)

2001
% Tax % GDP
revenue
3.63
0.45
0.17
0.93
0.13
0.09
1.54

0.02
0.12
0.02
0.01
0.19

0.77

0.10

a. Introduced in 1998-99; Figures in brackets are the percentages of total property tax
revenue.
b. Data are for April-December 2000, i.e. for 9 months.
Source: Director General of Taxation, Indonesia; Bank Indonesia, Annual report, 2001

First, the most important source of property tax revenue is the mining
sector (42.3 percent of the total in 2001); followed by the urban properties (25.5 percent) and transfer charge (21.2 percent). The authorities expect the share of transfer charge to increase overtime 8.
Second, the revenue from urban properties has been relatively
less buoyant in the recent years despite the effective rate increases in
1994 and in 2000. Indeed, in 2001, revenue from urban properties as a
percentage of the tax-revenue remained essentially constant as compared to previous period. This may be explained by a decline in property prices since the 1997 crisis, and sluggishness in the property

36 - Mukul G. Asher

sector. Low effective rate of tax is also a factor in relatively low revenue importance of urban properties, particularly as property valuation appears to be close to market values.
Third, the revenue importance of rural sector plantations and
forests is negligible, as their combined total is only about 10 percent
of the property tax revenue in 2001.
Fourth, it may be useful to also classify revenue from properties
according to their use. Thus, properties may be classified according to
residential, commercial, industrial, and special purpose properties, and
resulting revenue trends monitored. This is essential if limited use of
property tax for broader public policy purposes, such as encouraging
residential development and home ownership is contemplated. Granting of authority to regional authorities to use property tax as fiscal
incentive instrument to attract investment is likely to result in unhealthy tax competition, making the nation as a whole worse-off.
3. Property Tax and Decentralization
The property tax in Indonesia is designed and administered centrally,
but except for 9 percent collection cost, all the revenue from this tax is
shared with the provinces and districts. The central administration is
the responsibility of the Directorate of Property Tax, Directorate General of Taxation, Ministry of Finance. Its duties are undertaken through
106 regional offices. There are about 50 million taxpayers and 80 million properties. The Directorate is organized according to functions
such as property information, valuation, assignment, collection, and
appeals. A special group assigned to each regional office assists in valuing
properties. The local governments have a role in the collection process
by providing information and a follow-up. The PBB fiscal cadastre has
proved to be quite effective (Kelly 1995).
The central administration permits economies of scale to be
realized in property tax administration, particularly in investing in technology for valuation, and management information system. The administration costs are met from 9 percent of PBB revenue (BPHTB
revenue is not included). It should however be noted that 9 percent
collection costs do not fully meet the total cost of administering the
property tax, as salaries of the concerned staff continue to be met
from the central government budget. The property tax in Indonesia

The Role of Property Tax in Fiscal Decentralization in Indonesia - 37

since its introduction in 1986 has been a shared tax (Table 2). Because
of decentralization, the major change has been that the 10 percent
share of the central government has now formally been allocated to
local government (Table 2).
Two interrelated features of current property tax design and revenue sharing are of particular relevance for the decentralization process.
The first feature concerns complicated revenue sharing formula
for the property tax designed to introduce equalization elements
(Ahmed and Mansoor, 2002, 10). It may be more efficient and equitable to use expenditure grants and other taxes for equalization, freeing property tax to play more substantial role at the local level as discussed below. If each company pays the mining sector property tax
revenue directly rather than through Pertamina, there will be greater
transparency in allocation of tax revenue.
The second feature concerns the lack of control by regional governments over the rate structure of the property tax and other design
features (except for limited flexibility in setting the threshold exemption level). Relatively low levels of own revenue generated by particularly Kota (15 percent) and Kabupaten (5 percent) (Table 1) suggests
need to permit greater control and accountability by them in raising
recourses.
It is in the above context that the property tax can play a modest
role in fiscal decentralization process. The term modest is used because property tax revenue is unlikely to be large enough to play more
than a modest role in financing local government expenditure.
There is however a strong case for continuing with central administration due to possibilities of reaping scale and scope economies9,
and for ensuring consistency in administration. The central administration however would need to be responsive to concerns of local governments, including in minimization of arrears. Making PBB and
BPHTB a truly local tax, with local valuation and administration, is
not currently suggested, but may be kept as a very long-term goal.
Bambang (2003) reports that even the authorities in Jakarta, arguably
best equipped to administer property tax, are unenthusiastic about
shouldering this responsibility (2003, 3).
If the equalization elements are excluded from property tax
revenue sharing formula, and if the local governments are given some

38 - Mukul G. Asher

discretion in setting the tax rates for the PBB and BPHTB, then own
revenue share could exhibit modest increase10. Sidik and Kadjatmiko
(2002) have estimated that in 2001 PBB represented 4.8 percent of
the total local budgetary revenue, though there were substantial variations between regions (2002, 15). In addition, they estimate that BPHTB
accounted for about 0.9 percent of province and Kota/ Kabupaten
total budgets (2002, 16).
They suggest that not only the Kota/ Kabupaten should be given
the authority to set tax rate for PBB anywhere in the range of 0.1 to
0.5 percent (maximum currently permitted under the law) on capital
value of land and building less approved exemption, but that provinces should not share in the revenue from PBB and BPHTB (Sidik
and Kadjatmiko, 2002, 15-16). They suggest that loss of revenue to
provinces may be made up by changes in percentages of provincial
taxes, including oil and gas revenue shared with local governments.
Sidik and Kadjatmiko (2002) have also suggested that the 20
percent of non-oil income tax (PPh) revenue currently shared with the
provinces be provided wholly to Kota/ Kabupaten (2002, 17). They
again suggest that provinces be compensated through appropriate
changes in sharing of provincial taxes with local governments.
If the above recommended changes in property tax and personal
income tax are undertaken, they estimate that the share of own revenue will increase from 44 to 49 percent for provinces (excluding DKI),
from 30 to 84 for DKI; from 15 to 26 percent for Kota; from 5 to 11
percent for Kabupaten; and from 15 to 23 percent for combined regional governments (2002, Table 5, 18) 11.
The above suggests that DKI will be the primary beneficiary of
their recommendations. It also appears that the issue of vertical imbalance, particularly for the centre will need careful consideration. There
is already concern that the current system of inter-governmental transfers has resulted in central government moving from surplus position
(i.e. revenue share in the combined fiscal operations exceeding expenditure share) to a deficit position (IMF 2002; Ahmad and Mansoor
2002; and Sidik and Kadjatmiko 2002). If making property tax and
income tax share wholly local results in further adjustments in grants
to provinces, then the central governments deficit position may worsen
further. So it is essential that consensus is reached between the central
government and the provinces that such an outcome will be avoided

The Role of Property Tax in Fiscal Decentralization in Indonesia - 39

before further considering suggestions made by Sidik and Kadjatmiko

(2002). If such a consensus is not reached, then their suggestions need
to be held in abeyance.
It should be stressed that permitting local government to exercise greater discretion in rate setting (within prescribed limits) is not
inconsistent with centralized property tax administration and valuation. With discretion in rate setting, the revenue allocation will become more complex. This can be addressed through appropriate use
of information technology and software programme(s).
4. Concluding Remarks
Indonesia has embarked on a decentralization process with far reaching implications for its fiscal system and the political economy. While
the initial implementation of decentralization has been relatively
smoother than anticipated, formidable challenges in reaching the goals
of decentralization remain. These include addressing vertical and horizontal imbalances, building institutions, which could mediate in central-regional government as well as inter-provincial disputes, and provision of additional revenue sources from provinces and districts. Indeed, even partial reversal of ambitious decentralization can not be
completely ruled out.
This paper has analyzed the role, which the two components of
the property tax, Land and Building Tax (PBB) and change on Transfer
of Land and Building (BPTHB), can play in the decentralization process. The analysis in this paper suggests that there is a modest scope for
increasing the share of own-revenues particularly by Kota and
Kabupaten, if they are given greater discretion in setting the property
tax rates. The centralized administration is however considered necessary, as there are substantial scale and scope economies, particularly in
valuation. Making the property tax a truly local tax, including valuation, can realistically be only a very long-term goal. Continued improvements in valuation techniques and expertise and improvements
in implementing urban property tax will need to be further emphasized
if the property tax is to play greater role in Indonesias fiscal system.
Recognition and capacity building in information management and high
quality research concerning fiscal decentralization arrangements also
need to be strengthened.

40 - Mukul G. Asher

Notes
* For the purposes of this paper, US$1 = Rp 8,850 (mid-January 2003 rate).
** I would like to thank Jay Rosengard, Kadjatmiko, Gitte Heij, David Ray, and an
anonymous referee for useful comments, and Amarendu Nandy for research assistance.
The usual caveat applies.
1. Indonesias real GDP grew at an annual rate of 7.0 percent during the 1965-80 period,
6.1 percent for the 1980-90 period, and 5.8 percent for 1990-98 period. (The World Bank,
various years). Such high and sustained growth over three decades is indeed an impressive
achievement.
2. Before 1999, revenue share of the central government represented about 95 percent of
the total revenue; substantially more than 50 to 70 percent share commonly found in the
federal states such as Australia, India, and the United States (IMF 2002, 66-67).
3. The two intergovernmental grants are Dana Alokasi Umum (DAU- General Purpose
Fund), and Dana Alokasi Khusus (DAK-Specific Purpose Fund). The two replaced the
old system of intergovernmental transfers. DAU, which requires minimum of 25 percent
of revenues net of shared revenues to be transferred, is however by far the most important
of the two. The DAU transfers increased from Rp 4.25 trillion in 2000 to projected Rp
69.11 trillion in 2002 (Sidik, and Kadjatmiko 2002, Table 2, 3). These transfers are made
according to a complex formula, one of the major objectives being equalization of fiscal
capacities of regional governments to finance expenditures.
4. The criteria are enumerated in Sidik and Kadjatmiko (2002), pp.13-14.
5. The major change in revenue collection procedure was new Payment Point System (SISTEP)
under which selected banks were designated for tax collection and accounting, and for many
cases payment was made in one rather than several installments (Rosengard 1998; Kelly 1995).
SISTEP was field tested in 1989, and introduced nationwide by 1992. Further refinements in
payments and in property tax information for system have been continued since then.
6. Properties with 0.2 percent rate are called high value properties, and they generate
about half of the PBB revenue (Sidik and Kadjatmiko 2002, 15).
7. According to the data supplied by Indonesias Directorate General of Taxation, actual
property tax collection in 2002 was Rp 8.02 trillion, very close to the target of Rp 8.13 trillion.
8. Indeed, the 2002 budget envisages the share of transfer charges to increase to 27.1
percent of the total property tax (Bank of Indonesia 2002, Table 31, 265). Based on the
data supplied by the Directorate General of Taxation, the actual collections of the BPHTB
in 2002 however fell short by a considerable margin. As a result, it contributed only 20.5
percent of the total property tax revenue.
9. Economies of scope in the property tax context arise when different activities such as
valuation, and property records, and collection can be undertaken at a lower cost at a
central level than being undertaken by each regional and local tax jurisdiction separately.
10. IMF (2002, 75), and Sidik and Kadjatmiko (2002, 16-17) have suggested permitting
regions to impose surcharges (piggy backing) on taxes under central governments control.
Sidik and Kadjatmiko have also advocated giving substantially greater discretion in setting
tax rates for provinces and for districts on taxes levied by them (2002, 14-15).
11. They do not separate the impact of property tax from that of the income tax. In
2001, as the non-oil PPh revenue was Rp 69.7 trillion as compared to Rp 6.3 trillion for
property tax (Bank of Indonesia 2002, Table 31, 265) the impact of the PPh is likely to
be higher than of the property tax.

The Role of Property Tax in Fiscal Decentralization in Indonesia - 41

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