Dion Bisara & Janeman Latul

Second cars may be taxed up to 10 percent at the local level under new legislation. (Photo: Afriadi Hikmal, JG)

Indonesia To Reign In Local Levies

Anew law passed on Tuesday by the House of Representatives sets limits for the first time on the amount of taxes local governments can levy on businesses operating in their areas.

The law, which becomes effective on Jan. 1, 2010, is aimed at raising local revenues while at the same time eliminating unauthorized and unreasonably high regional taxes. As a consequence, the prices of new vehicles and cigarettes are likely to significantly increase.

In the absence of concrete regulations, local governments have been known to charge varying amounts of taxes on different business sectors. The new legislation caps the rate of tax local governments can charge motor vehicles, cigarettes, hotels and bars, advertising and mining activities. These new rates could be higher or lower than the prevailing levies, depending on the province.

Speaking after the passing of the bill on Tuesday, Finance Minister Sri Mulyani Indrawati said the new law would significantly increase locally generated revenue. “We estimate that by 2011, when this law is fully imposed, we will see total local budget revenues swell by 24 percent on average nationwide,” she said.

The law also slaps requirements on how local governments must spend their revenues to encourage sustainable development.

However, the bill is likely to see some key goods and services, including second cars, cigarettes and advertising, become more expensive, with prices set to vary from region to region. An important article of the law will allow local governments to increase taxes on car and motorcycle owners who buy second or additional vehicles.

The new law will allow local governments to annually impose a levy of between 2 percent and 10 percent on the owners of second and successive vehicles based on the vehicle’s sale value and the region’s road conditions.

Sri Mulyani said that the new law would encourage local governments to implement sustainable development policies as local governments would be requird to spend the revenues from the tax on maintaining and improving roads and public transportation.

Explaining the new regulatio n, Home Affairs Minister Mardiyanto told reporters that the taxes were aimed at increasing revenues for local governments. The higher prices for new vehicles would also reduce traffic congestion.

“Hopefully, the growth of roads and public transportation services will be able to match the growth in the number of cars on the road,” Hary Aziz, a Golkar Party legislator who helped draft the bill, said in a statement. After the passing of the bill on Tuesday, shares of PT Astra International, the country’s biggest automobile retailer, fell 3.5 percent to Rp 28,800 by market close.

Cigarette prices are also likely to rise, with local governments allowed to charge a maximum of 10 percent on top of the current duty on cigarettes starting 2014. Of this, 50 percent of revenue is required to be allocated to health care.

Sri Mulyani said she hoped the new law would be effective and eliminate unauthorized collections by bringing them under the umbrella of the regulations. “If the law is imposed consistently, there will be no more unauthorized taxes. Any collections outside this law will be dealt with by the Finance Ministry and the Home Affairs Ministry,” she said.

Sending out a warning to potentially avaricious local governments, Sri Mulyani said she expected local administrations to take into account the current difficult economic conditions businesses faced before they rushed to burden them with new taxes.

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