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Strengthening new paradigm of regional taxes and retributions This article was published in thejaka

Several petitions for judicial review have been filed with the Constitutional Court regarding Law No. 1/2022 on central-regional fiscal relations (HKPD). If the petitions are accepted, this law as well as hundreds of regional regulations on regional taxes and retributions will have to be revised.

The lawsuits followed controversy over sharp increases in entertainment tax rates in the first two months of this year. Businesspeople operating in the sector protested the taxes on types of venues such as discotheques, karaoke, nightclubs, bars and steam baths and spas, which were set at a minimum 40 percent and maximum 75 percent in Article 58, Section 2 of the fiscal relations law. 

These very burdensome tariffs could kill entertainment businesses and are deemed contrary to the government's efforts to enhance growth of both the sector and the economy. The majority of the lawsuits therefore demand that the relevant objects of entertainment be given the same rate as other entertainment services, namely a maximum 10 percent as regulated in Article 58, Section (1) of the law. 

Meanwhile, the government and legislators argue that the higher tax rates had been discussed with stakeholders, analysts and the general public, which considered the high taxes as a form of “sin tax”. The government claims that, in fact, a tax rate of 75 percent is regulated in the previous policy (Law No. 28/2009). 

Regional Autonomy Watch (KPPOD) has noted that apart from the entertainment tax, the fiscal relations law still raises a number of issues pertaining to Law No. 28/2009, especially the rates of a number of taxes that burden the business world. For example, the goods and services tax on electric power (formerly street lighting tax) sets a maximum rate of 1.5 percent for self-generated electricity. 

The increase in the rural and urban land and building tax (PBB-P2) rate from 0.3 to 0.5 percent and an increase of 5 percent on the acquisition duty on land and building rights (BPHTB) also burdens businesses. This problem shows two things. First, policymaking and governance did not involve public participation. 

The protests from business actors show that key stakeholders were minimally involved in discussing the draft law. Interestingly, the controversy only emerged two years after the law was enacted at the beginning of 2022. The belated reaction was caused by a provision in the law stipulating that all regional implementing regulations be issued two years after the law’s passage. This means that the process of drafting the regional regulations did not involve the public in a meaningful way, either. 

Second, the controversy over the entertainment tax rates shows that the paradigm has not moved appropriately in the corridor of decentralization and regional autonomy. Apart from hampering increased fiscal independence, the tax regulations have the potential to disrupt the investment climate and regional economic growth. It is therefore imperative now to reformulate the function of regional taxes and retributions (PDRD) as a stimulus to improve public services and economic competitiveness in the regions. 

Regional taxes and retributions have a dual function. Apart from being a source of local (budgetary) revenue, they also act as instruments for regulating social and economic behavior, including stimulating investment. 

According to a background paper by Mike Pfister (2009), a high tax burden will reduce business growth. Studies by KPPOD (2016, 2017 and 2019) also highlight that regional regulations on PDRD (tariffs) greatly influence the investment climate. The Central-Regional Fiscal Relations Law actually provides room for regions to optimize these two functions. 

This structural space appears in the tariff system, under which regions have flexibility in determining their tariffs in line with their potential and carrying capacity. The law also regulates fiscal incentives as a potential option for regional governments to use. The 2018 KPPOD study reveals an interesting fact that fiscal incentives actually attract investors to do businesses in the regions. 

In the post-reform implementation of regional autonomy, regions have complete control of planning, budgeting, policies, institutions and public services. Therefore according to Tjip Ismail (2011), regional taxes and retributions are encouraged not only to increase fiscal capacity but also primarily to regulate redistribution of private sector incomes and expenditures to sectors related to taxpayers or the community. 

Analyst R. Jaweng (2017) even asserted that the regulatory function of regional taxes should play a large role in the decentralized era, especially in providing broad access or facilities to communities and businesses to be more actively involved in regional development. 

This is a new paradigm for PDRD and in this paradigmatic scope, regional tax policies are mandated as an instrument to accelerate improvements in public services, empowerment, participation and regional competitiveness. Collaborative governance is the main precondition to strengthening this paradigm. 

Meaningful public participation, transparency, accountability, equality and the common good must be the pillars in designing regional taxation policies both on a national and local scale. According to the participatory democracy model as described by Y. Prastowo (2017), the process of designing tax policies must refer to public (citizen) consent as its compass. 

The citizenry and the state are identical. The two are not separate entities in the governance of regional tax and retribution policies. Supporting the methodological side, the attachment to Law No. 13/2022 encourages the use of the regulatory impact analysis (RIA) and the rule, opportunity, capacity, communication, interest, process and ideology (ROCCIPI) method. 

ROCCIPI places the public or stakeholders as key players, from designing to monitoring and evaluating regulations. In view of the limited institutional capacity of regional administrations to formulate regulations, the Finance Ministry and the Home Ministry should actively supervise and review the process of drafting regional regulations on taxes and retributions. 

The ministerial reviews should also explore and monitor aspects of procedural democracy, especially meaningful public participation in designing the policy. 

Written by: Executive Director of Regional Autonomy Watch (KPPOD), Herman N. Suparman
Source: https://www.thejakartapost.com/opinion/2024/04/15/strengthening-new-paradigm-of-regional-taxes-and-retributions.html.

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