Regional Tax

The fiscal relationship between the Central Government and Regional Governments in Indonesia has entered a new era with the enactment of Law Number 1 of 2022 concerning Financial Relations between the Central Government and Regional Governments (UU HKPD). This regulation, along with its implementing rule, Government Regulation (PP) Number 35 of 2023, restructures the framework for Regional Taxes and Regional Retributions (PDRD). This reform aims to increase regional fiscal independence through a higher Local Tax Ratio while simplifying tax administration to foster a more conducive investment climate.

1. Rebranding and Simplification of Regional Taxes

One of the most fundamental changes in the HKPD Law is the restructuring of regional tax types. The government has simplified these to reduce the administrative burden on taxpayers and collection costs for local governments.

2. Classification: Provincial vs. Regency/City Taxes

The HKPD Law clarifies the division of tax collection authority to avoid overlapping:

A. Provincial Taxes (Total of 7 Types):

• Motor Vehicle Tax (PKB).
• Motor Vehicle Title Transfer Fee (BBNKB).
• Heavy Equipment Tax (PAB).
• Motor Vehicle Fuel Tax (PBBKB).
• Surface Water Tax (PAP).
• Cigarette Tax.
• Option on Non-Metallic Mineral and Rock (MBLB) Tax — New Provision.

B. Regency/City Taxes (Total of 9 Types):

• Rural and Urban Land and Building Tax (PBB-P2).
• Land and Building Title Transfer Duty (BPHTB).
• PBJT (Food/Beverages, Electricity, Hospitality, Parking, Entertainment).
• Advertisement Tax.
• Groundwater Tax (PAT).
• Non-Metallic Mineral and Rock (MBLB) Tax.
• Swallow's Nest Tax.
• Option on PKB — New Provision.
• Option on BBNKB — New Provision.

3. The Option (Opsen) Mechanism: Provincial and Regency/City Fiscal Synergy

4. PBJT and the Entertainment Service Issue

PBJT is a major focus for retail and service businesses. The general PBJT rate is capped at 10%. However, the HKPD Law provides specific classifications for certain entertainment services such as discos, karaoke, nightclubs, bars, and steam baths/spas, where the rate is set at a minimum of 40% and a maximum of 75%. This policy serves as a control instrument for the consumption of services deemed to have specific externalities.

5. PBB-P2 and BPHTB in the Business Ecosystem

• PBB-P2: The Tax Object Sale Value (NJOP) remains the basis for tax imposition. The HKPD Law mandates that NJOP assessment be conducted more transparently and based on fair market values.
• BPHTB: The duty on land and building title transfers remains an important regional revenue instrument, with the maximum rate maintained at 5%.

6. Tax Incentives and Ease of Investment

In line with the spirit of the Job Creation Law, PP 35/2023 authorizes Regional Heads to grant Fiscal Incentives. These incentives can take the form of reductions, relief, exemptions, or the removal of regional tax sanctions for:

• National or regional strategic projects.
• Business sectors supporting regional economic growth.
• Taxpayers affected by disasters or macroeconomic conditions.

7. Digital Regional Tax Administration

PP 35/2023 mandates digital transformation in regional tax administration. Regional Governments are encouraged to implement e-tax systems, covering registration (e-Registration), reporting (e-SPT), and payment (e-Payment). This aims to minimize physical interactions to prevent corruption and improve accurate regional tax databases through integration with National ID (NIK) and central Coretax systems.

Conclusion

Regional Tax reform through the HKPD Law and PP 35/2023 is not merely an effort to increase local revenue (PAD) but a systematic step to create harmony in national fiscal policy. For business actors, the consolidation of taxes into PBJT and the certainty of fiscal incentives provide better room for financial planning. For local governments, fiscal independence is now driven through more transparent and accountable option synergies.