Personal income tax piggybacking: a potential subnational revenue instrument in Indonesia

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© Ray Witlin / World Bank © Ray Witlin / World Bank

Subnational governments often face the challenge of a vertical fiscal gap, where they rely primarily on transfers from the central government for their spending needs. Addressing this challenge requires reforms aimed at increasing their own tax and non-tax revenues. However, a typical question that comes up in such reform efforts is whether subnational governments have the administrative capacity to administer, collect and enforce revenue sources assigned to them.

Personal Income Tax (PIT) Piggybacking is a subnational revenue instrument that gets around this problem altogether. It is a subnational surcharge on the taxable income or income tax liability already levied by the central government, where the subnational government has some autonomy to set the surcharge rate. The idea is quite simple: the PIT administration stays with the central government, while the subnational government sets an additional surcharge on top of the income tax. This additional revenue accrues to the subnational government and helps close the vertical fiscal gap.

PIT piggybacking has mostly been a subnational revenue instrument in high income countries. At the same time, Indonesia is one of the few middle-income countries that has recently considered introducing this instrument.  Hence, we worked closely with the Ministry of Finance Indonesia to analyse the potential introduction of PIT piggybacking in the future. Our work shows that:

  • PIT piggybacking could be a major source of revenue for district governments in Indonesia. We estimate that the introduction of PIT piggybacking could increase district own-source revenue by an average of 8.3%. 
  • However, successful introduction of the PIT piggybacking requires that:
    • The tax administration can correctly identify taxpayer residence. This is because collected revenues levied by the district ought to be remitted to the taxpayer place of residence. This residence focus is needed to strengthen the fiscal contract accountability between subnational governments and their residents.
    • Taxpayers understand that the PIT piggyback is a subnational revenue instrument and not a central government one. This is because there is a risk that PIT piggyback may be mistaken to be a central government tax by residents. Taxpayer knowledge on this is crucial to strengthen the fiscal contract between subnational governments and residents.

We hence recommended that the Government of Indonesia (GOI) may invest in its ability to improve taxpayer residence data accuracy. This is an administrative requisite-condition for successful implementation. Hence, GOI can prepare the ground for introducing PIT piggybacking in the future by improving residence data.

We also recommended that GOI would need to increase awareness that PIT piggybacking is a subnational revenue instrument via public information campaigns and by changing PIT return forms when the instrument is introduced.

The report also discusses two case studies: Croatia and Denmark which identify a number of concrete implementation lessons for Indonesia. Croatia is one of the few middle-income countries to utilize a PIT piggyback.  To get a deeper understanding of the administrative set up of the piggyback as well as the challenges faced by Croatia, we organized a peer-learning session for the Ministry of Finance in Indonesia with tax administration officials from Croatia. This interactive session helped all participants understand implementation challenges and think through the right approach for Indonesia. We document the main findings from the peer-learning session in our report. A key part of the report also applies the findings to the Indonesian context, specifically on sequencing the reform in the future.


Muhammad Khudadad Chattha

Economist, Governance Global Practice, World Bank

Jürgen René Blum

Senior Public Sector Specialist

Roy Kelly

Professor of the Practice (Public Policy), Duke University

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