Local Government Taxing Power for Digital Consumption: A Case Study of Hotel, Restaurant, and Entertainment Taxes in Indonesia

Limited tax collection authority in local self-governments hampers revenue generation in rural regions with smaller populations and limited commercial activity, while the growth of the digital economy further complicates tax collection for local governments. The objective of this study is to examine the challenges encountered by both the central and local tax administrations in Indonesia when implementing consumption-based taxation, especially in light of the increasing prevalence of digital transactions. The study reveals that the shift from traditional to digital transactions is likely to result in conflicting taxing rights between central and local governments. Local governments are typically entitled to a share of taxes on certain forms of consumption, such as accommodation, food delivery, and entertainment. However, the use of digital platforms to provide these services has significantly reduced the local government's share of tax revenue. This issue is exacerbated when the central tax administration, with its competitive advantage, administers the transaction alongside the broader value-added tax object. In addition to the unclear tax-sharing arrangement, the underlying problem consists in the inadequate coverage of all digital transactions, potentially leading to revenue leakage and double non-taxation.