Following a protracted debate over the various duties on coal, the government says it will scrap the value-added tax (VAT) on the commodity.
The Finance Ministry's director general for taxation, Darmin Nasution, said in the latest proposed amendment of the VAT law coal would be excluded from the list of taxable goods, effectively exempting the commodity from the 10 percent tax.
The tax exemption, which is expected to provide more certainty for businesses in the sector, will still not apply to products derived from coal, Darmin said.
"There's always been a dispute over the VAT on coal, because in 1983 it was non-taxable then in 2000 it was taxable," he said Tuesday.
"We have now suggested coal be non-taxable again."
Being non-taxable, the government can simply collect royalties from coal producers without having to provide restitution -- or tax refunds -- for certain production facilities.
Darmin did not say how the tax exemption on coal might affect tax revenue. The government expects to collect some Rp 152 trillion in VAT revenue for this year and Rp 186 trillion for 2008.
A debate over the exact duties on coal arose in 2000 when a government regulation stipulated coal was non-taxable, which contradicted the VAT law at the time, which said the commodity was taxable.
This resulted in complaints from coal producers, who did not know how to claim tax refunds, affecting their cash flow and increasing production costs on facilities that had previously enjoyed tax incentives.
In reaction, many coal producers decided to withhold royalty payments to the government, which as of last year amounted to some Rp 5.4 trillion ($600 million).
The situation has been further aggravated because since 2005 the government has imposed a 15 percent tax on the commodity to ensure supply for the domestic market.
Demand for coal -- both for export and domestic use -- has been on the rise.
Indonesia, among the world's largest coal producers with 193 million tons in 2006, exported $4.6 billion worth of coal in from January to August, 2007, up 17 percent from the same period last year.
Local demand has risen in line with the government's energy diversification campaign to use more coal and gas rather than oil for industrial uses and power generation.