Challenges and Strategies in Increasing Property Tax Revenue in

Medan City, Indonesia

Khaira Amalia Fachrudin

, Elisabet Siahaan

and Imam Faisal Pane

Faculty of Economic and Business, Universitas Sumatera Utara, Medan, Indonesia,

Jl. TM Hanafiah Kampus USU Medan 20155

Faculty of Engineering, Universitas Sumatera Utara, Jl. Almamater Kampus USU Medan 20155

Keywords: Strategies, Rural-Urban Land and Building Tax

Abstract: Local revenues are very important for development. However, for the community, investing in property

sometimes poses incriminating tax expenses. Rural-Urban Land and Building Tax (RU L&B Tax) was

originally central government tax, but now it is local tax. The objective of this study is to formulate the

strategies in increasing the local revenues from tax in Medan City, Indonesia. The respondents of this

research are taxpayer society, Medan City tax authority, and lecturers in taxation. The results show that the

right strategies for Medan City are to generate public awareness and increase collection efforts.

1 INTRODUCTION

The financial strength lies in the ability to generate

revenues and liquidity and is associated with the loss

of an entity (Ames, et al., 2014). The financial

strength of a regions is very important to make them

be able to provide good public services. Increased

tax revenues can increase financial strength. Bahl

and Lin (20140 said that property taxes are very

important in developing urban strategies to support

sustainable growth. In some developed countries,

property taxes are used to finance local authorities

(Babawale, 2013). In United Sates of America,

despite a lot of critics over property taxes, the

government will continue to play an important role

in government finance (Spelman and Spelman,

2003).

In Indonesia, there are two types of taxes,

namely central taxes and local taxes. Rural-Urban

Land and Building Tax (RU L&B Tax) was

originally a central government tax. However, under

the Law No. 28/2009, valid from January 1

, 2011,

the government transferred RU L&B Tax into local

government. Hereafter RU L&B Tax referred as

L&B Tax only. RU L&B Tax is included in

property tax. Abbott (2008) says that property tax is

a tax that is levied on deemed value or against

income arising from the property. The tax is

traditionally associated with local governments

(Babawale, 2013). This alteration becomes a

challenge for Medan City Government to increase

local own source revenue.

Variable that can be controlled by the local

government is to determine the amount of tax object

sales value or land and building tax imposition base.

This base which was the basis of tax imposition in

2011 is still low and has not shown the market

values. Therefore, starting in 2014, the government

of Medan City increased the sales value of this tax

object to fit the market value up to 400% from the

previous one. Many people have objected and did

not pay for it until now. In addition, L&B Tax

payments are also constrained due to internet

connection problems.

The L&B Tax payment delinquency is not only

done by the object of personal tax, but it is also done

by hotels, educational institutions, entertainment

venues, and malls. Even, there is a large mall that

has not paid L&B Tax for 5 years. Whereas,

Campaign to Protect Rural England says that

investment in housing is relatively lightly taxed

compared to other investments.

Taxpayers do the investment in their house.

Investment will generate return, either in the form of

capital gain or yield (Fachrudin and Fachrudin,

2017), but the homeowners must pay the L&B tax.

Taxpayers’ opinion on the tax increase is also

important to determine the strategy to be

implemented.

Fachrudin, K., Siahaan, E. and Pane, I.

Challenges and Strategies in Increasing Property Tax Revenue in Medan City, Indonesia.

DOI: 10.5220/0010078014051408

In Proceedings of the International Conference of Science, Technology, Engineering, Environmental and Ramiﬁcation Researches (ICOSTEERR 2018) - Research in Industry 4.0, pages

1405-1408

ISBN: 978-989-758-449-7

1405

The valuation method of land and building tax

imposition base generally uses mass appraisal and

individual appraisals. Mass appraisal is used for big

amount of, homogeneous, not special characteristic,

and not high value tax objects. In mass appraisal,

land tax imposition base is calculated based on the

average indicative value contained in each land

value zone. Building tax imposition base of building

is calculated based on the list of building component

costs reduced by the physical depreciation.

Meanwhile, individual assessment is performed for

tax objects that have special characteristics, high

economic value, various type and size, high-rise

building, and multi-ownership. This method has not

been fully implemented by the Medan City

government due to resource constraints.

Hanoi and Vietnam find the same difficulties in

determining market value. In Vietnam, tax is not

calculated on market value, but rather is area-based

considering the location of property within a

particular zone of a city (Loan and Mccluskey,

2012). Loan and Mccluskey (2012) also summarize

the tax based in some countries, namely Estonia and

Latvia using market value. In Lithuania, land

valuation is carried out based on normative value,

while building is rated based on average market

value. Hanoi and Vietnam are based on land

categories multiplied by coefficient and rice price.

Medan City Government requires a tax collection

strategies which is, currently, not optimal. If land

and building tax imposition base is set at market

value, the target of tax revenue will be achieved.

However, some people object it. If it is lower than

land and building tax imposition base, it may not

lead the tax target revenue to be met. The

preparation of local government to establish the

value of taxable objects based on market value is

also a challenge due to the readiness of different

human resources both at central and local

governments.

The objective of this study is to answer this

challenge and to formulate strategies to improve the

financial strength of Medan City, such as how to

find the strategies to make public pay L&B tax, how

to get businessman pay L&B Tax, and how to make

land and building tax imposition base can be

determined at market value.

2 METHOD

This research is a qualitative research. Data obtained

through in-depth interviews. Respondent consists of

60 L&B tax payers taken from an University in

Medan alumni database and willing to be

interviewed, 5 lecturers in taxation subject, 2 central

tax officials, and 1 local tax official. Determination

of the lecturers and the tax officials is by looking at

their capabilities. Data was analyzed by inductive

reasoning, namely decision making which begins

with a specific statement to compile general

arguments.

3 RESULTS AND DISCUSSION

Based on results of interviews with the

taxpayers, an unexpected result is obtained i.e.

people who have property valuation knowledge

background (30%) tend not to have reluctance with

the amount of taxes to be paid. Meanwhile, people

without knowledge of property valuation (60%) tend

to find that since 2014 the amount of tax to be paid

is very expensive, it is unclear how to calculate the

tax amounts, and it is unfair and lead them to be in

tax arrears. They do not feel the impact of taxes

paid, for example, the width of the road in front of

his house remains unchanged even though they pay

taxes. Actually, the property tax is a direct tax, but

the public benefits received from the tax are often

indirect (Palmon and Smith, 1998). As much as 2%

of them think that the increase of land and building

tax imposition base 2014 is to make people

increasingly unable to stay in strategic areas and

those areas will be controlled by capitalists.

However, these are preliminary findings that still

require further study as they relate to the results of

Mukasa (2011) and Mukhlis, et al. (2010). Mukasa

(2011) found that perceived fairness taxes and tax

knowledge are related to tax compliance. Mukhlis, et

al. (2015) also found that tax compliance will

increase by increasing tax knowledge gained from

tax education.

As much as 10% of respondents complain

about having to pay L&B Tax when they are retired.

From the results of interviews with local

government, they said that retired tax object can

actually apply for relief. However, some people find

it difficult in the filing procedures. This is matches

with Sulija and Sulija (2005) in Babawale (2013)

which said the principle of equality is that taxes

must be calculated based on the ability of taxpayers

to pay rather than based on the highest and best use

of property.

From the results of interviews with local tax

officials regarding tax payment constraints, it can be

seen that the local government has mere cooperation

with local banks. In the future, cooperation will

ICOSTEERR 2018 - International Conference of Science, Technology, Engineering, Environmental and Ramiﬁcation Researches

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connect them to national banks to make it easier for

people due to the better national bank facilities.

For corporates which have not paid their RU

L&B Tax due to unclear ownership issues, the

government has asserted that tax payers are those

who take benefits of the land and buildings, instead

of the ones who own it. For mall which has not paid

its L&B tax for 5 years, the local tax authority

cooperates with the Corruption Eradication

Commission (KPK) and the Supreme Audit

Institution (BPK) to collect it.

When L&B was still a central tax, the tax

object data have been good. However, due to the

rampant construction, the data must be renewed.

Validation of tax object data must be performed. The

local government is still setting the value of land

based on the position, instead of the real market

value.

Based on the interview results with the

officials, there have been a lot of strategies

performed to optimize tax revenue, namely awarding

the entrepreneurs who pay property taxes on time,

cooperating with the BPK and KPK, socializing it by

holding L&B Tax Fair in 2015 and 2017 to increase

people enthusiasm to pay taxes, waiving a fine of the

last 5 years L&B delinquent, and validating tax

object data. Pinto and Tome (2017) find that tax

literacy has a positive influence on fiscal

performance. Based on this circumstance, it is

suggested that the government create activities to

increase the tax literacy of the community.

Another strategies planned by the Medan

City tax authorities are to strengthen cooperation

among agencies, e.g. 1) with the licensing section,

not to grant permission for those who have not paid

L&B Tax, 2) immigration, i.e. to blacklist big

companies which have not paid taxes, 3) tax law

enforcement needs to be more emphasized such as

by suspending bank account and shutting down the

business run by delinquent taxpayers. However,

these three suggestions should be further examined

for implementation; it is the challenge.

The results of interviews with lecturers in

taxation and central tax officials show that the

database of the tax object, the land and building tax

imposition base, and the status of land ownership

should always be updated. Local governments must

also firmly impose sanctions for those who do not

pay taxes.

4 CONCLUSIONS

People who do not have the background knowledge

in property valuation tend to feel that the property

tax to be paid is very expensive and it is unclear why

the amount to be paid increased since 2014.

Meanwhile, for those who have background

knowledge in property valuation will understand the

deemed values and income earned from the property

and will have no objection to the amount of tax to be

paid. Therefore, it is recommended that the Medan

City government socialize the tax bases and explain

the economic value of the land they occupy to make

it reasonable and people is aware that property tax is

important for development. Fachrudin and

Fachrudin (2016) found that financial literacy has a

great tendency in influencing investment decision.

Future research should study about effect of tax

literacy on the decision to pay taxes.

Many businessmen who have the awareness

to pay taxes, however, they are tax delinquents. The

strategy is to reward the obedient and sanctioned for

the delinquent.

Another strategy is to update the database of

tax objects and the land and building tax imposition

base based on market value. The local government

can heartily work with appraiser to avoid confusion

from the community and to provide an appraisal

education for its employees.

For people who cannot afford the tax

amount, tax deduction should be done in accordance

with their ability and in an easy procedure. For

payment process, the local governments should also

cooperate with banks that have better facilities.

ACKNOWLEDGEMENTS

The authors gratefully acknowledge that the

present research is founded by Directorate of

Research and Community Service Directorate

General of Strengthening Research and

Development Ministry of Research, Technology and

Higher Education accordance with research funding

agreement and community service for fiscal year

2018.

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