Fiscal Decentralization: Relationship Between Revenue Sharing of Income Tax, Tax Gap, and Local Government Performance

Abstract

ABSTRACT

Fiscal decentralization in the context of regional autonomy in Indonesia is carried out through the transfer of the Revenue Sharing Fund of Income Tax (RSFIT) from the central government to regional governments. The amount of the transfer of funds is calculated from the 20% realization of Income Tax revenue collected by the central government. The amount of funds received by the local government is calculated from the formulation of the total population and area. An increase in the number of people who pay taxes will increase the RSFIT allocation received by local governments. This study aims to analyze the relationship between the local government’s performance in collecting taxes and the amount of RSFIT. In addition, this study also intends to look at the relationship between the tax gap in each region on local government performance and the number of RSFITs. This study used a quantitative method with two analytical tools: descriptive analysis and causality test analysis. Secondary data sources come from income tax realization, income tax revenue-sharing funds, and tax gaps, which are grouped by provinces in Indonesia. The results showed that the performance of local governments in tax collection had a significant effect on the amount of the RSFIT allocation, with a p-value of 0.000 and a positive coefficient of 0.767. Meanwhile, the tax gap has no significant effect on the RSFIT allocation, with a p-value of 0.054 and a negative coefficient of -1.163. This study proves that local government performance in tax collection is a key factor in increasing RSFIT allocations. On the other hand, the tax gap can be a performance indicator for local governments in collecting taxes.