Fuel ex­cise a good op­tion for In­done­sia

The Jakarta Post - - OPINION - Paul Burke

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.

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