The concept of personal income tax piggybacking


Subnational governments frequently struggle with a vertical fiscal gap, which occurs when there is a gap between the functions or expenditure responsibilities and the financial resources available to them. This vertical fiscal gap results in subnational governments often being heavily reliant on intergovernmental fiscal transfers from the national government.

Addressing this challenge requires reforms aimed at increasing their own tax and non-tax revenues. The administrative ability of subnational governments (SNGs) to manage, collect, and enforce revenue sources that are assigned to them is a common challenge that arises in such reform initiatives.

Personal income tax (PIT) piggybacking is a local surcharge levied by SNGs on top of the taxable personal income or on the personal income tax liability already being levied by the central government. Administratively, the piggyback tax is collected by the higher government, thus reducing the administrative burden for the local government as well as reducing the compliance burden imposed on the taxpayer.

In contrast to tax sharing arrangements, piggybacking provides more SNG autonomy since the SNG is granted the power to set and levy the piggybacking rate, typically within certain bounds established by the central government, thereby strengthening the accountability between SNGs and their residents.

A recent report published by the World Bank draws attention on the PIT piggybacking as an potential and important source of SNG revenue in Indonesia. The authors found PIT piggybacking in Indonesia could increase district own-source revenues by an average of 8.3%, strengthen SNG accountability to their taxpayers, and provide the government with increased flexibility to address economic downturns in the future. The paper elaborated on the conditions that would need to be met prior to implementation and provided recommendations for the Indonesian government to prepare for the possible introduction of PIT piggybacking.

Key messages

For Indonesia, piggybacking on the PIT could serve two main objectives:

1. Strengthening SNG accountability to their taxpayers (fiscal contract). PIT piggybacking could enhance SNG accountability to taxpayers if certain conditions are met. These include SNGs setting the rate within central government limits, allocating PIT surcharge revenues to taxpayers’ residences, and linking taxes to public services. Taxpayers should be informed that PIT piggybacking is a local tax, and the salience of the system can be improved by modifying PIT returns to show the local surcharge separately, implementing information campaigns, and ensuring detailed rate setting procedures require local parliament approval.

2. Increasing public revenues. Enabling additional tax revenues to be collected through the introduction of PIT piggybacking could help provide the government with needed fiscal flexibility to address economic crises in the future, like the COVID-19 pandemic. This is because PIT, being a progressive tax, can help raise more revenues from high-earning individuals without burdening lower- and middle-income households.

The effectiveness of a PIT piggyback depends on complementary and requisite reforms. The authors outlined that effectiveness of a PIT piggyback depends on complementary and requisite reforms. Firstly, the correct identification of taxpayer residence is crucial for strengthening the fiscal contract between SNGs and taxpayers. The current taxpayer residence data in DG Tax is not systematically updated, making it less likely to achieve accountability and efficiency objectives. Secondly, the visibility and salience of the surcharge to taxpayers is essential to ensure that local residents are fully aware of the new revenue structure. These reforms are essential for ensuring the smooth implementation of PIT piggybacking.

The current lack of accurate taxpayer residence data makes it the wrong time to introduce PIT piggybacking. The introduction of PIT piggybacking in Indonesia is deemed inappropriate due to the lack of accurate taxpayer residence data. DG Tax should generate updated information on taxpayer residence to ensure accurate revenue allocation and prepare for administrative changes. A well-designed implementation strategy is also needed to raise awareness and educate taxpayers, tax-withholding agents, and tax department personnel. The note covers revenue mobilization in Indonesia, SNG revenue sources, PIT piggybacking, SNG autonomy, revenue and equity implications, challenges with inaccurate residential addresses, reform trajectory of PIT piggybacking, and implications for Indonesia.


The Indonesian government should consider introducing PIT piggybacking as an additional revenue instrument for Small and Medium Enterprises (SMEs) in the medium to long term. This could increase district own source revenues (OSRs) by 8.31%, strengthen SNG accountability to taxpayers, and increase flexibility for addressing future economic downturns like the COVID-19 pandemic by strengthening automatic stabilizers and countercyclical fiscal policy

PIT piggybacking should be introduced with certain pre-conditions, including SNGs having flexibility in setting their tax rates, Director-General Tax accurately identifying taxpayer residence, and increasing citizen awareness on PIT surcharge as an SNG revenue instrument (known by its Indonesian acronym “PAD”) rather than a central government tax (known by its Indonesian acronym “DBH”). This will strengthen autonomy and accountability, improve the relationship between citizens and SNGs, and improve the efficiency of the PIT surcharge system.

The Indonesian government should invest in administrative pre-reforms before introducing PIT piggybacking. This includes improving taxpayer residential information accuracy, preparing administrative systems and forms to clearly indicate the incremental PIT surcharge levied by the SNG, and preparing a communication outreach strategy to raise awareness about the PIT piggyback. The government could introduce PIT piggybacking as an additional SNG revenue instrument or replace the PIT DBH with piggybacking.

Read the full report (Open Access):

Roy Kelly, Muhammad Khudadad Chatta and Jürgen René Blum. Personal income tax piggybacking: a potential subnational revenue instrument in Indonesia. The World Bank.