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New study: Indonesia can boost economy, government revenues, and sustainability by adjusting land use taxes

December 17, 2015

  • Natural resources provide the government over $40bn/year (IDR 426 trillion) in revenues, but agriculture under-performs, contributing at rates only a tenth of Indonesia’s average tax-to-GDP ratio
  • More than 90% of government’s land use revenue is derived from instruments that indirectly encourage land expansion
  • The study recommends adjustments to revenue collection and distribution mechanisms along with more earmarking to sustainable land use initiatives

JAKARTA— At the recent COP 21 in Paris, the Indonesian government pledged a 29% reduction in emissions by 2030. Indonesia also has a goal to increase revenues by 21% compared to last year. A new study by Climate Policy Initiative (CPI) identifies fiscal reform opportunities in the land use sector that can help the nation achieve both these goals.

Up to a third of the government’s annual revenue comes from Indonesia’s land use sector, bringing in over USD 40 billion (IDR 426 trillion) each year. However, although the sector increases in value, government revenue from land use has not grown proportionately. Agriculture, in particular, generates strikingly low tax-to-GDP ratio of only 1.2% – well below Indonesia’s average tax-to-GDP ratio of 12%. Similarly, oil palm plantations’ tax-to-GDP ratio was only 3.4%, compared to the mining ratio of 6.2%. These findings suggest that government revenue collection from these key sectors can be improved.

The study also suggests Indonesia’s fiscal frameworks may be holding it back from achieving its sustainable development goals. Currently, 93.5% of all land use revenue, or USD 38.6 billion/ IDR 400 trillion derives from production volumes and profits, rather than land size based levies. This means the tax system provides little incentive for land use businesses to curb deforestation and increase productivity through use of existing lands. Furthermore, relatively little revenue from agriculture is transferred from the central to regional governments. Regions whose economies are dominated by the agricultural sector are not directly benefiting from increased productivity on existing lands, but from revenue generated through the Land and Building Tax and land permit issuance. As a result, this may lead to more land permits being issued and further land expansion, despite government goals to reduce deforestation.

“Indonesia wants to achieve sustainable land use,” said Mia Fitri, Country Manager leading Climate Policy Initiative’s Indonesia analyst team. “The government is also looking for ways to boost the economy and has ambitious targets to increase government revenue. A few small, but important adjustments to fiscal policies may be an efficient path forward to meet many of these goals simultaneously.”

The study maps three specific areas of opportunity to improve fiscal policies:

  • Adjusting taxes so that more revenue comes from land size-based instruments rather than production volumes.
  • Increasing transfers of revenue derived from the agricultural sector to regional governments.
  • Earmarking to incentivize sustainable land use through Adjustment Funds. Possibilities include requirements for regional governments to implement sustainability programs or meet sustainability targets in order to be eligible for Adjustment Funds.

For more information, and to download the study, visit www.ClimatePolicyInitiative.com/Indonesia.

Climate Policy Initiative (CPI) is a team of analysts and advisors that works to improve the most important energy and land use policies around the world, with a particular focus on finance. In Indonesia, CPI partners with the Ministry of Finance, Regional Governments, the Palangkaraya Institute for Land-use and Agricultural Research at the University of Palangkaraya, and other government, business, and civil society organizations.

CONTACT:

Indonesia – Tiza Mafira, tiza.mafira@cpi-indo.org; Guntur Sutiyono, guntur.sutiyono@cpi-indo.org

International – Elysha Rom-Povolo, elysha@cpisf.org