Fuel excise a good option for Indonesia
Paying tax isn’t much fun. But some taxes are needed to pay for public services. Indonesia is currently attempting to increase tax collections. In 2015, the central government’s tax take as a share of gross domestic product (GDP) was stuck at only 11 percent and this level does not change until now.
This is lower than neighbors such as Malaysia (14 percent), the Philippines (14 percent), Singapore (14 percent), or Thailand (16 percent). A low tax take makes it hard to fund government priorities, such as infrastructure projects.
One of the best options for increasing tax collections in Indonesia would be a new national excise on road transport fuels. There are a number of reasons why fuel excise is a smart tax.
The first is that it would be relatively easy to collect. There are only a handful of fuel retailers in Indonesia, meaning that collection costs would be low. Compare this to the challenge of collecting personal income tax from millions of income earners across the country.
Another advantage of fuel excise is that it would be a progressive form of revenue. The largest users of gasoline and diesel in Indonesia are the relatively well-off.
A new fuel excise could also help to reduce the severity of Indonesia’s traffic jams. With co-authors from the Australian National University and Universitas Indonesia, I recently published a study on Indonesia’s traffic jams in Transportation Research Part A: Policy and Practice. We found that fuel price increases help to ease traffic jams in Indonesia.
The research is based on studying the effect of past fuel subsidy reform episodes on usage of Jasa Marga toll roads.
An additional advantage of a fuel excise is that it would encourage uptake of fuel-efficient vehicles, thus leading to reduced pollution. Fuel excise is also a relatively fair way of funding road infrastructure under the user-pays principle.
The revenue from fuel excise could make a contribution to reducing Indonesia’s budget deficit. It could also be used to pay for important spending priorities. The need to increase other taxes would be reduced.
Many countries have adopted national fuel excises. The list includes Singapore, the Philippines, and Vietnam. Most Western countries have quite large fuel excises.
Indonesia currently has a small motor vehicle fuel tax, with revenue going to sub-national administrations. An opportunity exists to introduce a larger fuel excise to generate revenue for the national budget.
An incremental approach to reform could be taken. If a national fuel excise of Rp 500 (US$0.37) per liter were introduced, this could raise more than Rp 20 trillion per year. The excise rate could be increased at a later date.
A related reform priority is the removal of remaining fuel subsidies. This includes the 500 rupiah-per-liter subsidy for diesel. Subsidizing fuel places a burden on the national budget and works against energy efficiency and other goals.
The dual reform of removing fuel subsidies and adopting a national fuel excise would place Indonesia in a much better fiscal position.
There are ways to ensure that the poor are not disadvantaged. Some of the revenue from a fuel excise could be used to fund cash transfers to low-income households, for example.
We are in an era of rapid technological change, including in the transport sector. Electric, autonomously-driven vehicles are likely to emerge as popular options. Oilbased vehicles will become to be seen as last century’s technology.
A fuel excise would thus be able to provide a reasonable revenue stream over the medium term, but not the long run. As more and more cars run on electricity, alternative road pricing strategies would be needed.
To address local traffic jam issues, electronic road pricing is desirable. There have been proposals to trial such a scheme in Jakarta, but a trial has yet to go ahead. Singapore runs a successful electronic road pricing system.
Public transport is also a vital part of the effort to reduce traffic jams. While the first line of Jakarta’s Mass Rapid Transit (MRT) system is being built, the city faces large public transport investment needs if it is to catch up with world-leading cities in terms of public transport connectivity. Fuel excise could make a contribution to funding this investment.
Looking for a tax that could provide easy-to-collect revenue while helping to reduce traffic jams, encourage fuel-efficient vehicles, and provide other benefits? A fuel excise is a good option.
The largest users of gasoline and diesel are the relatively well-off.
The writer is a fellow at the Australian National University.