Business Community Cautiously Welcomes New Regional Tax Law

The business community has welcomed the law on regional taxes and levies, passed on Tuesday, in which the closed-list provisions will help specify and limit regional taxes and improve the business climate. The long-awaited law seeks to address the need for a better investment climate, after complaints about the burden of illegal levies. Following the new law, regions can only impose taxes and levies specified in the closed-list. They are not permitted to impose other types of taxes and levies, which may harm the regional investment climate.
The law covers 16 regional taxes — five for provinces and 11 for cities or municipalities. It also includes provisions on 30 regional levies. The law introduces new regional taxes including on cigarettes, swallows' nests, land and buildings in villages and cities, alongside acquisition fees for land and buildings. The taxes of up to 75 percent on certain entertainment shows and a progressive tax on private vehicles "might hurt people's purchasing power and [the] automotive industry.
Finance Minister Sri Mulyani Indrawati said there are "preventive and corrective" mechanisms to avoid illegal levies issued by regions in a bid to ensure a more positive regional investment climate. "There are sanctions and mechanisms — preventive and corrective. If they [try to] issue [illegal levies], they can be prevented by recommendations from the Finance Ministry, to be implemented by the Home Ministry," she said.
Regions are given greater authority to determine levies and given extra discretion to determine the rate of such levies, but taking into account the benefits to their areas. However, Mulyani said regions should take into consideration local economic conditions and the state of their industries when determining tax rates, to avoid negative impacts to the national economy.
It is expected the new taxes and levies will already be effective by 2011. Regional revenues will account for 24 percent of regional budgets, up from 19 percent this year. Most taxes and levies stated in the law should start to be implemented by 2011, as the regions will need time to issue supporting regulations before implementing new taxes, although the new law will start to be effective by next year. Acquisition fees for land and buildings will be fully implemented by January 2011, while taxes on land and buildings and on cigarettes will not start until 2014.
Source: The Jakarta Post, headlines p.1, 19 Aug. 09