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Westhill Consulting British Colombia, Hong Kong, Jakarta, USA: Jakarta weighs new land and property tax formula

Indonesian president Joko Widodo’s administration is sending mixed signals to the public about new tax regulations on property, as it aims to fill state coffers and introduce populist policies at the same time.

In a bid to meet a revenue target of 1.5 quadrillion rupiah (UScopy14 billion) this year, the government plans to introduce various measures, including revised property tax regulations.

The finance ministry says that starting from April it will adopt a new formula to collect luxury goods tax on landed houses or apartment.

“The formula will be based on [property] value, not on its size. Surely, the value will be more than one billion rupiah,” Finance Minister Bambang Brodjonegoro said last Monday.

The current luxury tax on property transactions is imposed on purchases of landed houses bigger than 350 square metres and apartments of more than 150 square metres.

Bambang said that determining “luxury” based on property size was not always accurate. For example, he said, a 150-square-metre apartment might be seen as luxurious in one location but not in another.

The government also plans to lower the property price limit when imposing 5% income tax on property transactions, to 2 billion rupiah (about 5 million baht) from the previous limit of 10 billion for houses of more than 500 square metres and apartments of more than 400 square metres.

But Anton Sitorus, head of research at the real estate services firm Jones Lang LaSalle Indonesia disagrees with the new proposed formula.

“This new regulation is aimed at boosting revenue from property tax. But a luxury tax on property should be regulated by size first, not based on its value,” Sitorus said.

“Luxury tax and income tax are two very different things, but they’ve been mixed up in this proposed formula.”

While Indonesia does not exempt a first house from tax, a central bank regulation makes it easier for people to acquirea first home by allowing a 20% down payment, compared with the normal requirement atleast of 30%.

But even as the finance ministry is preparing the public for new taxes, there is confusion about how united the government is behind the idea. Ferry Mursyidan Baldan, the minister of agrarian and land reform, in January called for a populist policy to scrap the taxable value of property, property transfer fees and the annual land and building tax in a bid to ease taxpayer’s burdens. He said he would propose the idea to the finance ministry.

The taxable value of property, also known as NJOP, is normally used to determine the value of land but it doesn’t always reflect in a property transaction since the actual transaction value could be lower or higher depending on whether the land is strategically plotted or not, despite being situated in a prime location.

To replace the NJOP as a determining factor for valuing land, Ferry said his ministry proposed a new system called land value zoning. He said it would be based on more concrete variables and spatial planning concepts and would set the land value higher if it was situated with good access to public facilities and infrastructure.

Ferry said he expected the initial phase of the new property tax regulation would be imposed by 2016 and would first exempt houses below 200 square metres, places of worship and other buildings used for social purposes. It would still collect property transfer fees and annual land and building tax on land and buildings used for commercial purposes and houses larger than 200 square metres.

Ferry’s proposal has met with opposition from regional governments. The central government in 2011 gave them the authority to collect land and building tax, and they fear that his plan would reduce their revenues.