Property Taxation in Indonesia

In 1986, Indonesia embarked on a major property tax reform, generally recognized as perhaps the most successful property tax reform in the developing world. The reform simplified basic tax policy, introduced innovative administrative reforms and generated substantial revenue increases. Since 1999, the property tax has again come under scrutiny for possible reform—this time to enable the property tax system to more effectively support the ongoing decentralization reforms.

This paper examines these two reforms—the initial property tax reform of 1986 and the potential property tax reform to further support decentralization. The first section reviews the specific policy and administrative reforms from 1986-2001, which laid a solid foundation for effective property taxation in Indonesia. The paper shows that the property tax in Indonesia has made substantial progress but continues to under perform by international standards. It is estimated that Indonesia could generate at least a 43 percent increase in property tax revenues.

The second section of this paper explores options to enable the property tax to better support the decentralization reforms. The fundamental change would be to grant tax rate discretion to local governments in order to promote autonomy and accountability, allowing a more efficient link between local revenue and expenditure decisions. The second change would be to allocate the property tax revenues entirely to local governments, providing more direct local government ownership of the property tax. The third change would be to adjust the relative administrative responsibilities between central and local governments while maintaining the current “co-administration” approach. These three changes could be implemented immediately within the current legal and institutional structure.