The Ipeda land tax in Indonesia

Abstract

Like many other Asian countries Indonesia inherited from colonial times a system of land taxation based on a detailed cadastre of all agricultural land. However in contrast with the experience of former colonial territories elsewhere in Asia the Indonesian government has ln the post- 1965 era been making a determined effort to revive land taxation as a source of revenue, and more important, to use

the revenues as a means of promoting regional government initiative in the selection and carrying out of local development projects. The tax is administered by a Directorate within the Ministry of Finance, whose regional offices are in charge of assessment down to individual taxpayers. Collection is done by village and regional government officials while the use of funds is determined by kabupaten governments subject to certain regulations from the centre and provinces. In Java, Bali, Lombok, and South Sulawesi assessment is based on land records dating from the final decade of Dutch rule. In other parts of the archipelago where the colonial government did not assess a land tax on peasant agriculture, methods of current assessment are rather ad hoc with considerable differences between regions. Any evaluation of the functioning of an agricultural tax imposed in a poor agrarian economy such as Indonesia must take into account not only the standard criteria for assesslng taxes such as equity, impact on resource allocation, administrative efficiency etc but also the rather more specialised arguments that have been developed in the literature for taxing agriculture and particularly agricul t ural land. Evidence available suggests that Ipeda in I ndonesia c ontravenes the principle of equity in that, while widespread exemptions are glven to urban income taxpayers, virtually all rural taxpayers have to pay both Ipeda and an assortment of other taxes some of which are assessed ln a very regresslve fashion. Rural producers are further penalised through gove rnment price policies for basic food staples such as rice and the renting of irrigated rice lands to the government sugar estates. There is little prima facie evidence in Indonesia of the relative undertaxation of the agricultural sector compared with the urban sector that has been the target of much discussion in countries such as India. In Java in particular the rural sector seemed to be bearing a heavier tax burden (when appropriate allowance was made for exempting those below subsistence and introducing a fairly modest degree of progression) than the urban sector in 1969-70 though more recent data is not available to substantiate these conclusions. On the other hand it seems probable that over the next two decades some form of agricultural taxation could play an important role in inducing a rather larger marketed surplus from the smallholder producers of food staples in particular than might be forthcoming through the market mechanism. The best compromise between competing objectives would probably be the assessment of Ipeda in the rural sector as a tax on presumptive income from agricultural land. The introduction of exemptions and progression should ideally be the same as urban income tax. However if the need for encouraging a larger marketed surplus is such that the rural sector will need to be more heavily taxed than the urban sector then there is a strong case for provision of some public goods at subsidised rates to rural producers. The use of Ipeda revenues by kabupaten governments has not on the whole been encouraging. In spite of a series of regulations stressing that they be used for rural development projects there is evidence from many regions that the bulk of the revenues are being used for routine expenditure and projects of dubious value to the rural population. More stringent control of budgeting procedures at kabupaten level would seem to be needed. Possibly the most important point to stress is that thinking of officials about planning at all levels should not be constrained by the amount of funds that can be raised within their areas; rather the emphasis must be on providing basic services for all members of the rural community and providing suitable machinery for granting and controlling the funds to make this possible. Show more