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Improving Land Productivity through Fiscal Policy

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Published: December, 2015

Indonesia’s government has ambitious dual revenue and emission reduction goals: its 2015 revenue targets are 21% higher than 2014 targets, and it aims to reduce emissions 29% by 2030. These dual goals make it a growing priority to find ways to encourage productive land use that can generate domestic revenue, while also curbing emissions and deforestation.

In a series of two studies, CPI’s analysis indicates that Indonesia has opportunities to improve its fiscal policy frameworks to meet both goals simultaneously. The first study, “A Framework for Analysis” looks at land use revenues broadly, pointing to promising opportunities to address inefficiencies. The second study, “Early Insights on Taxation in the palm oil supply chain” looks at how to  incentivize higher productivity models in the palm oil sector, more specifically.

Improving Land Productivity through Fiscal Policy: A Framework for Analysis

1-Proportion of Land-Size Based Levies Relative to Production-Based LeviesWhile there is observable GDP growth in the land use sector, government revenue is not experiencing the same growth rates (Ministry of Finance 2013). And while the tax-to-GDP ratios of some land use sectors, such as oil and gas and mining, are moderately healthy, other sectors, such as agriculture, are under-performing at a tenth of Indonesia’s average tax-to-GDP ratio (Prastowo 2013, Arnold 2012). At the same time, our analysis reveals that most revenue streams in Indonesia are based on production instead of land size. There is therefore no disincentive for producers using land unproductively, since levies will be the same whether production is done intensively or extensively.

This study points to promising opportunities to address these inefficiencies and adjust fiscal policy instruments to meet Indonesia’s revenue and land use goals. We find three specific areas of opportunity: 1) adjusting existing revenue collection instruments 2) increasing the transfer of revenues to local government and 3) earmarking more revenues to support reduced deforestation.

Improving Land Productivity through Fiscal Policy: Early Insights on Taxation in the palm oil supply chain

11-Estimated total national tax revenues for Indonesia palm oilIndonesia is the largest producer of palm oil, which makes a significant contribution to the national economy. However, palm oil is also a primary driver of deforestation and greenhouse gas emissions.

In a case study that looks specifically at palm oil taxation, we find that the industry contributed at least IDR 10 trillion (USD 1 billion) to national tax revenues in 2012/2013. However, the sector has a relatively low tax-to-GDP ratio of around 3.4%, confirming there is an opportunity to increase tax collection levels. The study also estimates that just 11-14% (IDR 1,103 billion/USD 106 million) of revenue from the palm oil sector was directly redistributed to local governments in 2012/2013, confirming the potential to increase and earmark revenue sharing, while paying due attention to the broader fiscal landscape.