Fiscal Reform (Taxation) On Local Government And

The New Administrative Duties

FISCAL REFORM (TAXATION) ON LOCAL GOVERNMENT AND

THE NEW ADMINISTRATIVE DUTIES

Dadang Suwanda
Lecturer Institute of Public Administration (IPDN) Jatinangor, Sumedang

Local autonomy is embodied in the form of delegated authority from the central government
to local governments as stipulated in the Act (Act) No. 22 of 1999 on Regional Government
and Law No. 25 of 1999 on Financial Balance between the Central and Local Government.
In relation to fiscal decentralization related tax policy changes that can be called a tax
reform (Tax Reform) gives a positive impact, especially in terms of tax to financing and local
revenue for local governments.

Keywords: decentralization, local government. Fiscal decentralization, local taxes, budget

revenue and expenditure (APBD).

A. CHANGES FROM CENTRALIZED TO DECENTRALIZATION SYSTEM.

Centralization is concentrating all authority over all matters pertaining to the level of the
central government. Centralization is widely used in government in Indonesia long before
the existence of regional autonomy. Even in the days of empire, colonial rule, as well as
at the time of independence. Nowadays, the affairs central government are:

a. Religion
b. Overseas
c. Justice
d. Defense
e. Security
f. Monetary within the meaning of printing money, determines the value of money, and
so on.

On the other hand, decentralization is actually a term in the organizational simply defined
as the handover of authority. In conjunction with the Indonesian government system,
decentralization is often associated with the system of government as a paradigm shift in
the Indonesian government. Decentralization is a delegation of authority from the central
government to the unit of government organizations in the region to organize all local
interests of a group of people who inhabit the region.
Decentralization is the delivery of government affairs in the form of the transfer of
responsibility, authority, and resources (money, people, etc.) from the central government
to local governments devoted solely to achieve an efficient administration. Thus,

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initiative, authority, and responsibility on matters submitted become the responsibility of

the central area, both regarding the planning, implementation, reporting and
accountability, as well as on the financing terms. The device is a device executing the
region itself. The purposes of decentralization are:
1. Preventing financial centralization;
2. As the democratization efforts of local governments to include the people responsible
for governance.
3. Preparation of programs for socio-economic improvement at the local level so that it
can be more realistic.

Decentralization can be done through a 4 (four) forms of activities utama, namely:

1. Deconcentration of administrative authority
Deconcentration in the form of a shift in the volume of work of the department to the
representative centers in the area without any assignment or delegation of authority to
take decisions or freedom to make decisions.
2. Delegation to the ruling authority
Delegation is the devolution of decision-making and managerial authority of special-
duty tasks to perform to an organization that is directly under the supervision center.
3. Devolution to local governments
Devolution is a condition in which the central government formed government units
outside the central government to give up some specific functions to the units were to
be implemented independently. Devolution is a more extensive form of
decentralization to refer to a situation where the central government to transfer
authority to the local government in terms of decision making, finance and
management.
4. The transfer of the functions of government to the private sector
Which is called as the transfer of government functions to the private sector or
privatization is handed some authority in the planning and administration of certain
responsibilities to private organizations.

B. REGIONAL AUTONOMY
With the enactment of decentralized system, began the era of regional
autonomy. Regional autonomy is the right, authority, and duties of the autonomous
regions to set up and manage their own affairs and interests of local communities in

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accordance with the legislation. When the system of government is changed from
centralized to decentralized, regional autonomy is owned by the local government.
There are two basic values that are developed in the Act of 1945 regarding the
implementation of decentralization and regional autonomy in Indonesia, namely:
1. Unitarian value, which is manifested in the view that Indonesia does not have another
unity government in which it is the state ("Eenheidstaat"), which means that
sovereignty is inherent in the people, the nation and the Republic of Indonesia will not
be divided between units of government.
2. Territorial Decentralization basic values, of the letter and spirit of article 18 of Law
1945 and an explanation as mentioned above it is clear that the Government is obliged
to carry out political decentralization and deconcentration in the constitutional field.
Attributed to two basic values mentioned above, the implementation of decentralization in
Indonesia centered on the formation of autonomous regions and handover/transfer of
majority power and authority from central government to local governments to regulate
and administer the most power and authority. The emphasis is on the regional autonomy
of the district/city with some basic considerations:
1. Political dimension, Level II Region has seen less fanaticism regional separatist
movements so that risks and opportunities for the development of federalist
aspirations relatively minimal;
2. Administrative dimension, governance and service to society relative can more
effectively;
3. Level II area is the area "spearhead" the implementation of development so that the
Regional Level II who better know the needs and potential of the people in the region.

On this basis, the principles of autonomy are:

1. Real, according to the situation and the objective conditions in the area;
2. Responsible, aligned/strived to accelerate development in the entire country.
3. Dynamic, being the means and the drive for better and advanced.

C. AUTONOMY IN THE FIELD OF FINANCIAL

Decentralization is a worldwide and is part of the strategy of each institution that wishes
to be efficient in the global competition. Similarly, the Republic of Indonesia, where the
decentralization of authority and divided into becoming an integrated part within the

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Unitary State of the Republic of Indonesia, which is expected to move efficiently and
effectively so as to cope with global challenges.
Autonomy is a derivative of decentralization, therefore autonomous region is an area that
is independent in the initiative. Level of independence and derivatives of organized
decentralized level shows that the higher the degree of decentralization of the higher level
of local autonomy.
In terms of legal analysis by the enactment of Act No. 32 of 2004 and Act No. 33 of
2004, the area has great opportunities to translate it into operational order. Laws can not
be implemented without implementing regulations. In this context, regional autonomy has
a sense of freedom to carry out the construction. In other words, the area has the
opportunity to formulate the steps of development in line with the interests of the unitary
state and not in conflict with applicable law or regulation includes the laws themselves,
the implementation itself).
Thus the autonomous region is a region that is entitled and obliged to regulate manage his
own household. One is the financial management area. Implementation of local
government functions will be implemented optimally if the host government affairs
followed by search revenue sources sufficient to regions. With reference to the law on
fiscal balance between the central government and local governments in the amount
adjusted and harmonized with the division of authority between the central government
and local governments.
The financial relationship between the state and local finance can be described as follows:
1. President as head of government holds power state management that are part of
government power;
2. The President then hands over power to the regional head (governor/regent/mayor) as
the head of local government to manage the finances of regional and local
governments in the ownership represent separate assets;
3. The relationship between central and regional management concerning the
relationship of income (revenue) and utilization (expenditure) either for routine
expenses as well as regional development in order to provide quality public services,
responsibel and accountable;
4. The concept of the relationship between central and local administration is the
relationship and regional relations. The relationship is arranged through the central
government's obligation to allocate equalization funds to local governments. Thus, all

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the financial resources attached to any matters submitted to a source area of local
finance.
From the explanations above, it can be seen that the relationship between the central
government and local governments in financial management can be viewed from three
aspects:
1. In a judicial review. State Financial Management in Indonesia based on Act No. 17 of
2003 and in this law has expressly stated that one of the country's financial scope is
local finance. As the implementation of this then stipulated Government Regulation
No. 58 Year 2005 on Regional Financial Management. Legally, it can be said that the
relationship between the central and the local government in terms of financial
management is the implementation of financial management are based on
Government Regulation No. 58 of 2005 as the implementation of Act No. 17 of 2003.
2. In Overview System of Government. President is the head of government as well as
the financial management of state authority. With the issuance of Act No. 32 of 2004,
the president delegates the authority to the head of the region as the head of the
regional administration and one of the authorities that are delegated authority in the
area of financial management.
3. In the Forms Overview State. Indonesia is a unitary state. Its firmness constitution is
not negotiable. In the conception of the unitary state, there is no separation between
the central government and local governments. Delegation of authority to local
governments does not mean the central government does not supervise the
implementation of the regional administration. One of the supervisions is in the area
of financial management. Regional autonomy is implemented as long as it’s remained
within the framework of a unitary state so that the central and local relations in this
conception is a supervisory relationship.
D. FISCAL REFORM ON LOCAL GOVERNMENT.
1. History of Taxes in Indonesia
Taxes in Indonesia is preceded by Land and Building Tax (PBB). In the past, PBB
was better known as the land tax. The levy is applied to land or land owned by the
people of Indonesia. Withholding tax on this land began VOC impose land tax
called landrete. The people forced to pay a sum of money from the amount of land
prices or the results of its land.

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Furthermore, in the days of Governor General Daendels, colonial administration

claimed that all the land in Indonesia is owned by the Dutch. At that time it was called
as The Dutch East Indies. He draws high taxes included in the form
kerjapaksa. Which are used specifically for building highway Anyer-Panarukan.
At the time of British settlement, landrete policy change. Governor General Raffles
charge a tariff of 2.5% for the indigenous groups and the tariff of 5% for land owned
by other nations.
When the Dutch returned to power, came the idea to impose income taxes. In the
years 1920-1921 has no income tax on crops or crops resident. the term known
as Warde versponding the form of taxes to the tea gardens, coconut, tea, and
tobacco. The imposition of tariffs of 7.5% of the crop. In 1934 published the motor
vehicle tax, after the birth of other taxes until the time of independence until now
(Accountant Magazine IAI period from March to April 2015).
2. Fiscal Reform In Current Local Government.
The implementation of the regional autonomy policy has changed the pattern of
administration and fiscal management in Indonesia which was originally centralized
to decentralized. The immediate implication of this policy is the area given discretion
to manage their purchases in accordance with the needs and priorities of each region.
Sources of funds in the budget can be allocated to fund the implementation of the
obligatory functions and affairs of choice in the form of programs and activities
related to the improvement of public services, job creation, poverty alleviation,
improvement of environmental quality, and economic growth in the region.
Fiscal decentralization through revenue sharing between the center and regions in
accordance with the principle money follows function as an effort to support the
financing of various affairs and the authority that has been delegated to the regions is
one of the implementations of the paradigm of central and local government
relations. The initial policy that was formulated in the Act no. 22 and no. 25, 1999,
among others, is characterized by the allocation of the General Allocation Fund
(DAU) as a source of financing various government functions, revenue sharing from
the extraction of natural resources in the area concerned, and the delegation of the tax
authority to local governments. Furthermore, amendments to legislation
decentralization conducted in 2004 focused the monitoring mechanism by the central
government, and improvements to the accountability of local government spending.

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On the fiscal side, Act no. 33 of 2004 enlarges the basis for tax revenue from natural
resources owned by the region, as well as of other national-level taxes, and the
expansion of the total funds that become a source of DAU. Changes in the fiscal
decentralization policy itself is a reflection of the growing fiscal needs at the local
level, the practice of soft budget constraint of the central government were also
caused by the slow pace of reform of local taxes. Related changes in taxation policy,
Indonesia has made several changes in tax policy that can be called a tax reform.
Tax as a revenue source is one of the most important instruments in fiscal
decentralization, because it reflects how much the revenue authority is owned by a
governmental level. Aside from being a source of income, the tax is also an
instrument for managing demand and supply of local public goods, instruments for
measuring the transparency and accountability of local government to the public, and
the instruments to influence consumer behavior/local public. Acceptance is also a
reflection of how large an area is trusted and has the ability to manage their own
sources of revenue to finance its expenditure. If the fiscal is consolidated and
managed at the central level, then the transfer will be a dominant role. Meanwhile, if
some important fiscal resources are managed by region, the transfer should be less
dominant. The tax authority which is owned by a governmental level has several
levels, from simply picking or administrative authority, the authority to determine
tariff, until the authority to determine the type and the tax base. In the lowest levels of
authority, local governments levy only given authority (delegation).
Taxes have two main functions, namely the function
of budgetary and regulatory. Budgetary functions related to the tax function as a tool
to raise funds from the public which are then used to pay for administration and
development activities. While the regulatory function is a function of tax relating to
oajak role in regulating the economy, resource allocation, redistribution of income,
consumption and public investments.
By looking at the two functions of the above it is clear that taxation is a product of
government policy in the areas of fiscal/financial. We have to look at the taxation
policy (with the tax system) in Indonesia which has undergone major changes in the
period since the reform era Indonesia's independence until now. The taxation system
must always be adapted to the changing socio-economic conditions in Indonesia. Tax

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system undergo changes quite important because it is based on various factors which
requires the existence of a system of taxation that is more in line with the conditions
of the existing reality.
We can present the reality when the era of "80s" when his was a decline in world oil
prices which led to a decline also to acceptance of oil and gas sector as the main
reception state at that time, which requires governments to explore the sources of state
revenue from other sectors that one of which is a tax that has not been managed
optimally. Hence arises a new taxation policy to trigger an increase in state revenue. It
is as one example that the tax system as a state policy in the field of finance must
change with changes in socio-economic conditions that exist.
Present condition. In the scheme of fiscal decentralization in Indonesia, local
governments are given the authority to levy and determine rates on a limited basis
(maximum rate specified by law) for some types of local taxes determined by
law. This causes the area only has a very limited yan instruments to manage the
revenue function.Although in reality, many areas passed a law to levy taxes or levies
that have an impact on high-cost economy.
In today's era of regional autonomy, the area is given a greater authority to regulate
and manage their own household. The aim, among others, is to get closer to public
services, make it easier to monitor and control the use of funds from the budget, in
addition to creating a healthy competition between regions and encourage
innovation. In line with these authorities, local government is expected to be able to
dig up financial resources, especially to meet the financing needs of government and
local development through Local Revenue (PAD).
This has led to an increase in the responsibility of governance (the provision of public
goods and economic development) at the level of a very large area, especially in the
field of education which is an essential element in the development of the region and
has become one of the main needs of the population. However, local ability to
maintain and improve the organization can be said to be very limited, given the role of
Local Revenue (PAD) especially local taxation issues is still low in the reception area
budget city/county and readiness of the human resources (HR) and management
capabilities at the local level is still very limited.
The shifting of authority and the implementation of various tasks puts local
government (city and county government as a spearhead implementation of

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Autonomy) in a difficult position. In addition to the limited financial capabilities and

human resources, local government is also faced with an increasingly dynamic
business environment as a result of the wave of economic globalization. Globalization
is almost unstoppable, spreading to every corner of the region through the vehicle of
travel, transport and telecomunication, more affordable and convenient for its
users. The globalization process has opened up opportunities and opportunities for
economic actors to expand its business, both of which have been running for this as
well as new types of businesses. As a result, the local government is also faced with
the demands of the development in the region.
One of the key determinants of the success of local government in responding to the
challenges above is the local government response to fiscal decentralization is an
important part in the implementation of regional autonomy. Two extreme sides of the
response in question is (a) whether the local government is focused to enlarge the role
of PAD in the structure of the reception area in order to increase their financial
independence or (b) local authorities concerned with increasing the effectiveness of
its expenditure policy in the field of local governance processes.
All reforms of decentralization, in many cases, are not in line with the readiness of
government officials to implement the regional autonomy optimally. Local
government officials during a more centralized whose role as a shopper used to be
relatively passive and served as a specialist, while decentralization requires the
officials to act as an important actor to be active and serves as a generalist. Improved
knowledge, understanding, and mastery of concepts as well as technical and juridical
aspects related to financial management are necessary requirements as well as a
sufficient condition so that government officials can carry out the role and functions
of the new as well as possible.
One of the key determinants of the success of local government in responding to the
challenges above is the response to fiscal decentralization especially in the reception
area that is an important part in the implementation of regional autonomy.
Historically taxes have long been a potential source of revenue for the state to fund
government spending and development. Tax can be understood as a forced levy by the
government against its people (taxpayers) who do not provide direct contra used to
finance public expenditure (budgetary) and to organize everything that exists outside
the financial sector (the regulator). According to Prof. Dr. Rochmat Soemitro, SH,

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Tax is a levy people to the state treasury under the law (which can be imposed) with
no counter-achievement but is directly demonstrated instead and used to pay for
general expenses.
E. READINESS OF LOCAL GOVERNMENT IN ANTICIPATING FISCAL
REFORMS
1. STRENGTHENING OF TAXATION SYSTEM.
Since regional autonomy was rolled out in 2001, the area has been given the freedom
to pick and manage their own sources of revenue from the region. With the enactment
of Act No. 34 of 2000 in lieu of Act No. 18 Year 1997 on Regional Taxes and Levies,
the area was given the authority to levy 11 (eleven) types of tax, which is 4 (four)
types Provincial Tax and 7 (seven) Tax types Regency/City in accordance with the
maximum tax rate specified in the legislation. In addition, the district/city is still given
the authority to establish other types of tax so long as it meets the criteria set out in
the legislation and establishes types of levies other than those specified in government
regulations. In fact, the flexibility is still not effective to raise revenue in order to fund
the implementation of regional autonomy. It is particularly indicated by:
a. The absence of significant changes to the composition of local revenues. '
In 2010 and 2011, the contribution of local tax revenues and levies to the
provincial budget income/district/city are respectively 14.2% and 14.9%. The
condition is relatively not show significant changes compared to 2001, where the
contribution of local tax revenues and levies on the total income of the provincial
budget/district/city is of 11.9%. Relatively low taxes and levies role shows that
most of the area is still heavily dependent on the DAU, DBH, and DAK as the
main source of budget receipts. Thus giving the opportunity to wear the new
levies were originally expected to improve the reception area, in reality, not much
is expected to cover the shortage of budget expenditure needs. '
b. Taxes and levies tend to be counterproductive to the regional economy. Almost all
the new charges set by the Regional unfavorable impact on the investment
climate.Regional levies which resulted in many high economic costs because of
the overlap with the central levies and tend to impede the flow of goods and
services between regions. The conditions resulted in investment activity in the
region into the regional economy is not growing and highly dependent on the
expansion of the budget expenditures.

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c. Regions in delivering the low compliance regulation Regional Tax and

Retribution to the Central Government. In principle, the provisions of local
taxation should not be contrary to public interest and/or legislation are higher. To
ensure this, each local regulations governing taxes and levies within a period of 15
(fifteen) working days from the set must be submitted to the Central Government
for evaluation. Nevertheless, there are still many areas not submit legislation to
the central government and some Regions still enforce legislation which has been
canceled by the Government. Ineffective oversight because of existing laws do not
regulate sanctions against local governments that violate these provisions.
d. The limited tax base in the district/city setting powers of taxation and levies that
existed at that time was less support the implementation of regional autonomy.
Granting a greater powers to the regions in the governance and services to the
public should be followed by granting greater powers in taxation and
levies. District and city tax base is very limited and the lack of authority of the
province in the determination of tax rates resulted in the area is always difficult to
meet expenses. Dependence of a very large area to the equalization funds from the
center in many respects less reflects local accountability. Local governments are
not compelled to efficiently allocate budgets and lack of local control over the use
of local budgets because they are not burdened with taxes and levies.
To increase the accountability of local autonomy, local government should be given
greater authority in taxation and levies. The need for it is accommodated by the
Central Government with the revision of taxation in the area through Act No. 28 of
2009 on Local Taxes and Levies. The Act has regulated several new provisions
relating to:
a. Broadening the tax base and levy which can be managed by the local government
Broadening the tax base and levy which can be managed by the region through the
expansion of the object of taxation and levies, the transfer of some central taxes
into local taxes, and the addition of a new tax. Expansion of the taxation object
made against the Motor Vehicle Tax and Duty of Vehicle which was extended to
include government vehicles, Taxes expanded to include the entire rental in the
hotel, restaurant tax extended to include catering services. Meanwhile, the
expansion of the object of retribution carried out against the imposition
Disturbance Permits expanded to include supervision and control of business

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activities on an ongoing basis to prevent disturbance of order, safety, or public

health, the environment, the safety and health norms. Central taxes whoch were
diverted into areas include the Customs taxes on Acquisition of Land and Building
(BPHTB), who transferred in 2011 and the Tax on Land and Building Rural and
Urban (PBBP2) were transferred starting in 2014. While the new types of taxes
and fees that can be managed by local governments are Swallow's Nest as a tax
district/city, Cigarette Tax as a new tax for the province, Service Fees Tera/Tera
Birthday, Education Services Levy, Levy Control Telecommunication Tower, and
Fisheries Business Permits.
b. The maximum and minimum limits of the provisions in the imposition of local tax
rates.
The intent of determining the maximum limit is to avoid the stipulation of high tax
rates that can add excessive burden to society. Meanwhile, the determination of
the minimum rate for the purpose of avoiding war interregional tax rate for the tax
object is moving, such as motor vehicles. Specials Vehicle Tax, tariff-setting
policies directed at reducing the level of congestion in urban areas by providing a
Regional authority applying progressive tax rates for both vehicle ownership and
so on.
c. Tax Base smoking on cigarette tax.
Cigarette Tax rates was determined definitively so that the government can
maintain a balance between the tax burden to be borne by the tobacco industry
with national and local fiscal needs through the establishment of national excise
rates.
d. Addition of levies other than those specified in Constitution.
Local Governments are given the opportunity to increase the types of levies other
than those specified in the legislation so long as it meets specified
criteria. Addition of the levy is intended to anticipate the delivery of services and
licensing functions from central government to regions which will be regulated by
government regulation.
e. Earmarking policies to certain types of local taxes
To improve the accountability imposition of levies, a part of the result of the
specific local tax revenues is allocated to finance activities that can be felt directly
by the tax payer. Street lighting tax portion is allocated to finance street lighting,

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motor vehicle tax portion is allocated for the construction and/or maintenance of
roads and improvement of modes and means of public transport, and the Cigarette
Tax partly earmarked for financing public health services and law enforcement
f. Changes in the mechanism of supervision over local charges from repressive
system into a system of preventive and corrective.
Any legislation draft on taxes and fees, before evaluated and set as local
regulation, has to be evaluated by the government. Local regulation that has been
set can be canceled by the Government if it is contrary to the public interest and/or
higher legislation. The authority of the cancellation of the original regulation was
transferred to the Interior Minister to the President to strengthen the legal basis for
the cancellation.
In addition, areas violating the laws and regulations in the field of local taxes and
levies may be liable to delay and/or cutting the general allocation fund and/or
revenue-sharing or restitution.
2. STRENGTHENING OF LOCAL GOVERNMENT WITH ACCRUAL
ACCOUNTING SYSTEM
The reform era provides a strong signal that there is transparency and accountability
in financial management. In connection with that at first, the government has enacted
Government Regulation No. 24 of 2005. The existence of these regulations is only
temporary and the date of October 22, 2010 has been replaced by Government
Regulation No. 71 Year 2010 concerning Governmental Accounting Standards (SAP).
Fundamental changes in Government Regulation No. 71 of 2010 is the change from a
cash basis to accrual basis accounting into the government. These changes are in
addition to be done to fulfill the mandate of the legislation in the field of public
finance to follow the government's implementation of international accounting which
has been referred to the Internatonal Public Sector Accounting Standards (IPSAS)
issued by the International Federation of Accountants (IFAC).
The scope of regulation Government Regulation No. 71 Year 2010 include Accrual-
Based SAP and SAP-based cash towards accrual. Since the enactment of this
Government Regulation in October 2010, all reporting entities, both at the central and
local governments have been obliged to implement accrual-based SAP, but for
reporting entities that are not yet ready to apply full accrual-based SAP, the transition
period is still allowed to use SAP-based cash towards accrual until 2014.

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As the mandate of the regulation, in the scope of local government has issued
Minister Regulation No. 64 Year 2013 on "Implementation of SAP Accrual Based on
local government". Excess accrual accounting, among others, present information that
is more complete and fulfilling managerial supervision functions.
Factors of readiness of the local government, will be very important in implementing
accrual accounting which should be implemented since 2015, to the head of the region
need to be made regulations regarding accounting policies, accounting systems and a
standard chart of accounts (BAS).
With the application of accrual-based SAP is expected to be a lack of transparency,
participation and accountability of financial management in order to realize good
governance ( good governance ).
F. CLOSING.
Noting the problems mentioned above,it can be concluded that:
1. Local governments need to do a precaution against changes in fiscal reform is the
policy of the central government.
2. In anticipation of the fiscal reforms, it is necessary to strengthen the local
government system of local taxation.
3. Precaution that needs to be done is to improve the government’s accounting
system including improving the system of accrual-based asset management area.
4. IPDN is an educational institution in charge of preparing cadres of local
government leaders to prepare for a better future, for that we are ready to work
together to meet the needs of local governments for financial management
including anticipation of fiscal reform.

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 Presidential Decree No. 95 Year 2007 concerning the Seventh Amendment Decree No.
Pesiden 80 Year 2003 on Guidelines for Procurement of Government Goods/Services
 Presidential Decree No. 27 2014 About the Management of State/Regional.

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 Fiscal Reform (Taxation) On Local Government And
The New Administrative Duties

 Regulation No. 21 Year 2011 regarding the Second Amendment to the Regulation of the
Minister of Home Affairs No. 13 of 2006 on Regional Financial Management
Guidelines.

Internet
 http://www.anneahira.com/otonomi-daerah.htm Local authority after Law of Regional
Autonomy, 2014.

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