The issuance of the Law on the Harmonization of Tax Regulations (UU HPP) marks the enactment of the latest regulations regarding taxation in Indonesia. Numerous regulations are affected. Some of them had massive framework changes. There are also several new settings that have never been used before. One of the most interesting to discuss is the implementation of Carbon Tax.
As the name implies, a carbon tax is a tax levied on carbon emissions that have a negative impact on the environment. This tax is imposed on activities that generate carbon and the sale of carbon-containing goods. Its general purpose is to amend business behavior towards clean practice business by reducing carbon dioxide and greenhouse gas emissions, thereby diminishing the impact level of global warming.
With such a taxation paradigm, it can be assumed that there might be several business sectors in certain segments that are highly affected by the enactment of such tax, for example energy-sector enterprises. The enactment of this provision will certainly affect its business processes because these kinds of companies will be the first to bear the burden of carbon tax, namely when purchasing materials as production inputs or when conducting carbon-related activity. Even though its main purpose is to restrict the usage of carbon based products/activities -thereby forcing these companies to find alternative material that are more environmentally sound-, it is still not improbable that carbon tax imposition will make financial impact to these enterprises and present them the idea to distribute the tax burden to the end-customer by charging them more than they should. Thus, it can be inferred that the Carbon Tax might have a regressive impact on the end consumer as they would have to bear the highest burden of carbon tax imposition along the supply chain.
Reviewing the Regressive Impact of Carbon Taxes
Regressiveness is an unavoidable impact of a carbon tax. This will be increasingly felt if the product or service that is sold or carried out is widely used/utilized by the community and the nature of the demand for the product or service is inelastic. This will become a problem if it turns out that the majority of these goods or activities are consumed by low-income people and these goods/activities do not have substitutes yet. The government's role is needed to protect affected communities and the industry.
The government can start by identifying consumers for goods or activities that contain carbon emissions. This is important in order to map the degree of consumer dependence on these goods or activities as well as the relative economic capacity of each group of final consumers. For end consumers who have a large income or sufficient economic capacity, the imposition of a carbon tax may not have a very significant regressive effect because these consumers have sufficient resources to accommodate the impact of rising prices for these goods/activities so that the government does not need any efforts to reduce it. But for low-income people, regressivity will erode their economic capacity and they have no other choice but to save on their other expenses.
The government may be able to minimize the risk of regressiveness by providing government transfers to affected community groups. However, this is actually impractical and actually counter-productive to the initial goal to be achieved, namely to minimize the production and consumption of activities or goods that contain carbon emissions. If the government provides assistance, then it actually encourages the use of activities/products that produce carbon footprints, not reduce them.
An alternative solution that may be effective and efficient in minimizing the risk of regressivity is to implement a "carbon tax exemption" on the delivery of activities or goods to end consumers, especially for goods/activities consumed in large quantities for low-income communities. This scheme can also benefit the industry affected as this might help them to preserve their cash flow by maintaining their sales level. The "Carbon Tax Exemption" mechanism for delivery to the final consumer can be also combined with settlement of the Highest Retail Price for such product or activity to control the selling price of the activity or goods traded to the final consumer. Thus the carbon tax is actually only collected at the producer level up to the distributor level. This can minimize the impact of the inclusion of the carbon tax component that is borne by producers or distributors into the cost of goods sold so that the selling price of goods or services can be controlled. In addition to that, The authority could also provide the affected industry some special research grants to help them conduct the necessary research to explore the alternative solution to help them switch their business practice. This will certainly provide incentives for producers/sellers to look for alternative environmentally sound business practice as it affording them to maintain their bottom line. Consumers will have alternative product choices at competitive prices while reducing the level of consumption of goods or activities that produce carbon emissions.
The imposition of a carbon tax certainly has a lofty goal for the development of the Indonesian state. However, in theory, there is still the possibility that this regulation impacted several communities and industry, one of which is the regressivity of imposing a carbon tax. The alternative solution should be quickly found because it might affect the economic stability in Indonesia. Surely, strong collaboration and synergy are needed between various stakeholders so that the implementation of carbon tax can be productive and effective.
