The legal framework for Regional Taxes and Regional Retributions (Pajak Daerah dan Retribusi Daerah, or PDRD) is primarily governed by Law Number 1 of 2022 regarding Financial Relations between the Central Government and Regional Governments (Undang-Undang Hubungan Keuangan antara Pemerintah Pusat dan Pemerintahan Daerah, abbreviated as UU HKPD). This statute, effective from January 5, 2022, repealed Law Number 28 of 2009 to streamline local taxation, reduce administrative costs for businesses, and enhance local fiscal independence. Under Article 1, Point 21 of Law No. 1/2022, Regional Tax is defined as:

“Pajak Daerah yang selanjutnya disebut Pajak adalah kontribusi wajib kepada Daerah yang terutang oleh orang pribadi atau badan yang bersifat memaksa berdasarkan Undang-Undang, dengan tidak mendapatkan imbalan secara langsung dan digunakan untuk keperluan Daerah bagi sebesar-besarnya kemakmuran rakyat.” (Regional Tax, hereinafter referred to as Tax, is a mandatory contribution to the Region owed by individuals or entities that is enforceable based on the Law, without receiving direct compensation, and is used for Regional needs for the greatest prosperity of the people.)

The administration of these levies is further detailed in Government Regulation (PP) Number 35 of 2023, which provides the technical guidelines for collection, assessment, and regional regulations (Peraturan Daerah or Perda).

Classification of Regional Taxes

Law No. 1/2022 categorizes taxes based on the level of government authorized to collect them, specifically distinguishing between Provincial and Regency/City (Kabupaten/Kota) levels. A significant reform in this law is the consolidation of several consumption-based taxes into a single category to simplify compliance.

Provincial Taxes

Provincial governments are authorized to collect five specific types of taxes as stipulated in Article 4, Paragraph (1) of Law No. 1/2022:

  1. Motor Vehicle Tax (Pajak Kendaraan Bermotor - PKB): Levied on the ownership and/or possession of motor vehicles.
  2. Motor Vehicle Title Transfer Fee (Bea Balik Nama Kendaraan Bermotor - BBNKB): Levied on the transfer of ownership of motor vehicles due to sale, exchange, inheritance, or contribution to a corporate entity.
  3. Motor Vehicle Fuel Tax (Pajak Bahan Bakar Kendaraan Bermotor - PBBKB): Levied on the use of fuel for motor vehicles.
  4. Surface Water Tax (Pajak Air Permukaan - PAP): Levied on the extraction and/or utilization of surface water, excluding use for basic household needs and small-scale farming.
  5. Cigarette Tax (Pajak Rokok): A surcharge on the excise duty imposed by the central government on cigarettes.

Regency and City Taxes

Regency and City governments have a broader range of taxes, though several previously distinct taxes have been merged. Excluding Land and Building Tax (PBB-P2) and Land Acquisition Fees (BPHTB), which are handled separately in the legal framework, the taxes include:

  1. Tax on Certain Goods and Services (Pajak Barang dan Jasa Tertentu - PBJT): This is a consolidated tax replacing the former Hotel Tax, Restaurant Tax, Entertainment Tax, Parking Tax, and Street Lighting Tax.
  2. Advertisement Tax (Pajak Reklame): Levied on all forms of advertisements or commercial displays.
  3. Groundwater Tax (Pajak Air Tanah - PAT): Levied on the extraction and/or utilization of groundwater.
  4. Non-Metal Mineral and Rock Tax (Pajak Mineral Bukan Logam dan Batuan - MBLB): Levied on the extraction of non-metallic minerals and rocks such as asbestos, limestone, or sand.
  5. Swallow’s Nest Tax (Pajak Sarang Burung Walet): Levied on the extraction or cultivation of edible bird’s nests.

The “Opsen” (Option) Mechanism

A critical structural change introduced by Law No. 1/2022 is the “Opsen” system, which replaces the previous revenue-sharing (bagi hasil) mechanism. An Opsen is an additional levy calculated as a percentage of the primary tax. According to Article 1, Point 23 of Law No. 1/2022, Opsen is defined as “the addition of tax collected by the Region on the main tax.” The current rates and applications are:

  • Motor Vehicle Tax (PKB) Opsen: Collected by Regency/City governments at a rate of 66% of the PKB due to the Province.
  • Motor Vehicle Title Transfer Fee (BBNKB) Opsen: Collected by Regency/City governments at a rate of 66% of the BBNKB due to the Province.
  • Non-Metal Mineral and Rock Tax (MBLB) Opsen: Collected by Provincial governments at a rate of 25% of the MBLB due to the Regency/City.

Tax on Certain Goods and Services (PBJT)

PBJT represents the most significant change for corporate entities operating in the service and hospitality sectors. Under Article 50 of Law No. 1/2022, PBJT is levied on the sale, delivery, or consumption of goods and services including food/beverages, electricity, hotel services, parking services, and arts/entertainment.

The standard maximum rate for PBJT is 10%. However, specific thresholds apply to certain sectors:

  • Electricity Consumption: Rates vary based on use (e.g., industry vs. household), with a maximum of 10%, though electricity generated for self-use may be subject to different regional policies.
  • Entertainment Services: For specific high-impact entertainment such as discotheques, karaoke lounges, nightclubs, bars, and steam baths/spas, the tax rate is set at a minimum of 40% and a maximum of 75% (Article 58, Paragraph 2).
  • Exemptions: PBJT does not apply to small-scale businesses (MSMEs) whose turnover falls below a threshold determined by the local Regional Regulation (Perda), nor does it apply to government-provided services or non-profit activities.

Regional Retributions (Retribusi Daerah)

Regional Retributions are payments for services provided or permits granted by the Regional Government specifically for the benefit of individuals or entities. Article 1, Point 22 of Law No. 1/2022 defines them as:

“Retribusi Daerah yang selanjutnya disebut Retribusi adalah pungutan Daerah sebagai pembayaran atas jasa atau pemberian perizinan tertentu yang khusus disediakan dan/atau diberikan oleh Pemerintah Daerah untuk kepentingan orang pribadi atau Badan.” (Regional Retribution, hereinafter referred to as Retribution, is a Regional levy as payment for services or the granting of certain permits specifically provided and/or given by the Regional Government for the interest of individuals or Entities.)

Under Article 87 of Law No. 1/2022, Retributions are classified into three categories:

1. General Service Retributions (Retribusi Jasa Umum)

These are levies for services provided by the Regional Government for the purpose of public interest and benefit, which can be enjoyed by individuals or entities. These include:

  • Health services (at regional clinics/hospitals).
  • Waste/cleanliness services.
  • Market service levies (for traditional markets).
  • Parking services on public road shoulders.

2. Business Service Retributions (Retribusi Jasa Usaha)

These are levies for services provided by the Regional Government by prioritizing commercial principles, typically utilizing regional-owned assets. These include:

  • Use of regional-owned property (land/buildings).
  • Wholesale and/or distribution centers.
  • Terminal usage.
  • Place of lodging/guest houses owned by the region.
  • Sales of regional business production (e.g., seeds, compost).

3. Certain Licensing Retributions (Retribusi Perizinan Tertentu)

These are levies for the issuance of permits by the Regional Government to individuals or entities for the purpose of regulation and supervision. Following the enactment of the Job Creation Law (UU Cipta Kerja), several permits were abolished or centralized. Under Law No. 1/2022, the remaining authorized licensing retributions are:

  • Building Approval (Persetujuan Bangunan Gedung - PBG): Formerly known as IMB, this is a levy for the issuance of building permits.
  • Alcoholic Beverage Distribution Permit: For the supervision and control of alcoholic drinks.
  • Foreign Worker Utilization Plan Approval (Pengesahan Rencana Penggunaan Tenaga Kerja Asing - RPTKA): Levied on the utilization of foreign workers for the compensation of expertise development.

Principles of Collection and Sanctions

The collection of PDRD must follow the “closed list” principle, meaning regions are prohibited from creating new types of taxes or retributions not explicitly listed in Law No. 1/2022. According to PP 35/2023, the assessment of taxes can be conducted via:

  • Self-Assessment: Where the taxpayer calculates, reports, and pays the tax due (e.g., PBJT, MBLB).
  • Official Assessment: Where the tax authority issues a Tax Assessment Letter (Surat Ketetapan Pajak Daerah - SKPD) based on data held by the region (e.g., Advertisement Tax, PKB).

Administrative sanctions for non-compliance include interest penalties, typically set at a percentage per month of the unpaid tax, as regulated in Article 82 of PP 35/2023. The maximum duration for the imposition of interest is 24 months. Furthermore, local governments are empowered to conduct tax audits and investigations (penyidikan) into criminal acts in the field of regional taxation, as authorized by Article 101 of Law No. 1/2022.

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