CHAPTER 1 INTRODUCTION. governments, and existing situation in the Bantul Regency.

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1 CHAPTER 1 INTRODUCTION A. Background This research has three conditions which are used as the background. There are fiscal decentralization, need for further fiscal power of local governments, and existing situation in the Bantul Regency. 1. Fiscal Decentralization Indonesia is a country which consists of many islands having different potencies, cultures and economic situations, so new legislations, which transferred part of central government s authorities and revenue sources to local governments, were introduced in Thus, local governments enable to design and decide their own local policies which could be tailored and responsive to their special regional needs and situations. Decentralization consists of administrative and fiscal parts. Law No. 32/2004, which is a revision of Law No. 22/1999, provides administrative decentralization and Law No. 33/2004, which revises Law No. 25/1999, deals with fiscal decentralization. Law No. 32/2004 allocates administrative authorities among central, provincial and regency governments. In response to newly allocated responsibilities, Law No. 33/2004 allows regency governments to look for additional revenue sources.

2 2 According to Law No. 28 of 2009 which stipulates Local Taxes and Retributions, Rural and Urban Land and Building Tax, which had been previously shared between central and local governments, was converted into a genuine local tax. While the tax authority of Rural and Urban Land and Building Tax (LBT) has been gradually transferred to the regencies of Indonesia, local governments (regency and municipality governments) can only receive two thirds of the total revenue of Rural and Urban LBT before Need of Further Fiscal Power of Local Governments One of revenue source of the local government is Pendapatan Asli Daerah (PAD) or Local Governments Own Revenue. PAD is revenue collected by local governments based on the national regulation (Law 33/ ). In order to enable local governments to effectively fulfill their administrative responsibilities so as to respond correctly and adequately to day-to-day administration and development in their respective areas, local governments must have fiscal independence supported by an adequate share 2 of PAD or alternatively, financial assistance from the central government. In Indonesia, comparing with aggregated revenues of regency governments, provincial governments, and domestic revenue of the national budget, the share of local government s revenue was only 5.30% in As a comparison, the shares of developing countries, newly developed countries and 1 Law 33/2004 concerns sharing the revenue of central and regional governments 2 An expert from the World Bank (Glynn Cochrane) stated that 20% is the minimum of local 2 An expert from the World Bank (Glynn Cochrane) stated that 20% is the minimum of local revenue to allow for local governments to run with regional autonomy. If local revenue is less than 20%, the region will lose its credibility as an independent entity

3 3 OECD countries in 1990 s were 9.27%, 16.59%, and 19.13% respectively 3. Therefore, a share of the local government s revenue in Indonesia could be increased to the level of international developing countries by strengthening the local governments taxation authority. 3. Existing Situation in the Bantul Regency In order to examine the existing financial problems of local governments, the Bantul Regency, which is one of the typical regencies where urbanization has recently started, is chosen as the model regency for this research. The local revenue of the Bantul Regency does not reach far enough to cover its total expenditure. Table 1.1 shows that the local revenue has only amounted to10-11% of total expenditure. Table 1.1Total Revenue and Expenditure Bantul Regency No Year Local Revenue Expenditure Percentage ,637,099, ,012,356,847, ,900,086, ,151,935,591, ,624,239, ,345,680,130, Source: Ringkasan Perubahan APBD Kabupaten Bantul Tahun Anggaran 2012 Table 1.2 shows a comparison between LBT revenue and other local tax revenues. While other local tax revenues increase significantly in 2011 because BPHTB 4 was transferred from the central government, shares of the LBT in the local tax revenue space were still 34% both in 2011 and While total amount 3 Sidik, Machfud, 2002, Format Hubungan Keuangan Pemerintah Pusat dan Daerah yang Mengacu Pada Pencapaian Tujuan Nasional, Seminar Nasional Public Sector Scorecard, Jakarta 4 Based on Law 28/2009, BPHTB (Bea Perolehan Hakatas Tanah dan Bangunan) or Tax on Acquiring Land and Building becomes one of local taxes as of January 1, 2011.

4 4 of BPHTB is larger than that of the LBT, as BPHTB is based on the volume of commercial transaction, BPHTB can be fluctuating depending on economic situations. Therefore, it will be reasonable for local governments to rely on the LBT, which is calculated on stable or even increasing value of properties. The focus is therefore made on the LBT 5, which has been the stable and major tax for the Bantul Regency. Table 1.2LBT revenue and other local tax revenues in the Bantul Regency: Local revenue Year source from local taxes LBT revenues (billion rupiah) Other local tax revenues (billion rupiah) Source: Bantul in Figures 2011, Bantul in Figures 2012, and Ringkasan Perubahan APBD Kabupaten Bantul Tahun Anggaran 2012 B. Objective In order to achieve further fiscal decentralization, it is discussed and proposed how to increase local government s revenue by focusing on the LBT in the Bantul Regency. 1. A fundamental problem of the existing LBT, that is, the existence of a gap between NJOP (Nilai Jual Objek Pajak: assessed value of land for calculating LBT) and real market value of land in the Bantul Regency is examined. 2. The historical reasons that created the gap are also examined. 5 The LBT s tax basis is consisted of not only lands but also buildings. While there are the same problem of the gap between the NJOP and real market price both in lands and buildings, as major part of the Bantul area is still rural area, the share of the LBT for buildings is much smaller than that of for lands. Therefore, the target of this research can be limited only to the LBT for lands in order to simplify this study.

5 5 3. The needs and impacts of an increment LBT are examined. 4. The most practical measure for increasing the LBT will be recommended. C. Research Location The location of this research is the Bantul Regency which is located in the Yogyakarta Special Province which consists of four regencies and one municipality. Administratively, the Bantul Regency is composed of 17 districts, 75 villages and 933 hamlets. The Bantul Regency borders with Yogyakarta City and Sleman in the north, Gunung Kidul in the east, Kulon Progo in the west, and the Indian Ocean in the south. The Landscape of the Bantul Regency consists of plain in the middle, hilly in the east and west, and coastal area in the south, so Bantul has various land types. The villages in the Bantul Regency are subdivided on the status of a rural village (rural area) and an urban village (urban area). The total area of the Bantul Regency is nearly 510 km or 15,9% of the total area of Yogyakarta Special Province with 40% of the area as a low-lying topography and more than a half (60%) as less fertile hilly areas. Land use of the Bantul Regency is dominated by settlements and ground area (36%), wet rice fields (33%) and dry lands (15%)

6 6 A Figure 1.1Yogyakarta Special Province (A) located in Java Island, a province of Indonesia. Source: In 2005, more than 40% 7 of population in the Bantul Regency worked in the agriculture sector. At that time, almost in all of districts were also evenly engaged in agriculture sector, except in the Pandak District, where most residence works as craftsmen. In Table 2.1we can see that those who worked in agriculture sector in 2010 represented 19.17% of the total, while in just the next year (2011) those engaged in the agro-sector were only 15.67%. 7 Data from Ringkasan Laporan Penyusunan Rencana Strategis Pengembangan Ekonomi Lokal (PEL) Kabupaten Bantul 2007

7 7 Table 1.3Percentage of population 15 years and over who work in the Bantul Regency in 2010 and Sector Agriculture Manufacturing industry Trade, Hotel, and Restaurant Services Others Total Source: Bantul Regency in Figures 2010 Figure 1.2Yogyakarta Special Province consists of 4 regencies and 1 city.

8 Figure 1.3Bantul Regency comprises 17 districts. 8