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Editorial: Bali Tourism & Taxes

While Local Debate Rages on New Ways to Tax Bali's Tourists, The Real Solution May Be that Less is More.

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Bali economist, Dr. Nyoman Erawan speaking at a seminar in Bali (12/9) on "Controlling the Cumulative Effect on the Environment" resurfaced the suggestion, popular in some circles, that tourists to Bali should be charged an "environment" or "culture" tax in order to provide badly needed revenues to local government authorities. Dr. Erawan argued that a 2.5% tax on all tourism expenditures would help compensate Bali for the indirect subsidies enjoyed by tourists in the form of government subsidies on gasoline, power and basic food stuffs.

While no one can argue against the fact that tax revenues contributed by tourism have an important role to play in Bali’s public sector economy, government officials should exercise extreme caution before increasing taxes on the tourism sector. Get it wrong, and Bali will become uncompetitive in comparison to the professionally promoted neighboring destinations in the region.

Let’s not lose note of that fact that taxes levied on tourists are, in a very fundamental way, voluntary taxes. Tax visitors to the point that a destination is seen as poor value for money, and the tourist start taking their money and their holidays elsewhere.

A high tax rate on a small tax base could mean imprudently applied additional taxes for Bali is a zero sum game.

Tourism: Already a Major Source of Tax Revenue

Bear in mind that tourists visiting Bali already pay a very substantial tax contribution. A 10% local development tax is applied on hotel and restaurant bills; value added taxes are applied on many purchases made by visiting tourists ranging from local tours to purchases made at Bali’s supermarkets; wages paid at local establishments made possible by the spending of Bali's visitors are subject to payroll taxes; corporate profits from tourism enterprises incur taxes up to 35%; and, lastly, before leaving the country tourists will pay a final Rp. 75,000 airport service charge before boarding their flight home.

Let’s Sort out the Current Tax Mess First

A strong argument can be made that the real problem in terms of Bali's taxation collection is not one of a lack of taxes on visiting tourists but the current grossly inefficient system of collection. The long-ranging public debate in Bali's Parliament has made no secret of the fact that tax calculation on the island is a moveable feast in which entrepreneurs negotiate with the tax collectors. The ensuing three-way tug-of-war invariably results in the public getting the shortest end of the stick.

Unsurprisingly, officials are often reluctant to reveal the amount of tax collected and when they do, the amount reported seem very inadequate in comparison with the size of the island’s tourism industry. To cite one illustrative point, the Bali Post carried the story several months ago of how a popular locally owned hotel paid only Rp. 20 million in the mandatory 10% local development tax for a single year. Meanwhile, a foreign-managed hotel in Nusa Dua, paid a Rp. 25 billion tax bill for the same period. The legislators, according to the paper, were openly bemused that a successful hotel, by extrapolation, had only achieved a total annual turnover of US$ 20,000.

The story in other areas of tax collection - from airport departure taxes, fiscal levies on departing residents, to securing a new driving license is, sadly, much the same. The amount of total revenues collected in taxes have little rhyme or reason with collectors enjoying wide ranging powers to negotiate and finalize tax settlement with local business people.

First Things First

While we have the ultimate respect for Dr. Erawan's skill as an economist, there seems little point in introducing new tax sources for Bali until the current system of tax collection is revamped and upgraded. We suggest, in fact, that with a few simple improvements in how tax revenues are collected the total money available to the public form taxes on the tourism might increase dramatically, making the environment tax suggested by Dr. Erawan completely unnecessary.

The Answer: Transparency

A straight-forward solution on how to collect more tax revenues is available, providing the island's leaders have the political will to do the "right thing."

For a start, if all taxes collected from local restaurants and hotels were published in the local press once a year it’s conceivable that the amount of tax collected would suddenly undergo a dramatic increase. The open publication of taxes paid by each hotel and restaurant would destroy any existing incentives to seek special treatment from local tax officials. Entrepreneurial pride and civic duty would make it difficult for business people to understate their sales when they knew such figures would eventually be published side-by-side with the total tax contribution of their competitors. Additionally, employees of those same enterprises would offer another form of effective control as they would compared tax payments with the similar 10% service charge paid to them by most hotels and restaurants. And, finally, perhaps the best argument for the transparent publication of an annual business by business listing of taxes paid is that such a list would also provide the total tax revenues available to local government for expenditure on public projects, a question heretofore shrouded in mystery.

It's really that simple and, We guess, also that difficult. All that's lacking is sufficient political will to do the "right thing" for both Bali and its future.

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