After years of delay, govt set to tax Batam
Fabiola Desy Unidjaja and Dadan Wijaksana, The Jakarta Post, Jakarta
President Megawati Soekarnoputri has signed a decree allowing the government to levy value-added tax (VAT) and luxury goods tax on domestic transactions in Batam island -- a move that will predictably spark protest from proponents of a free-trade zone for the island.
The presidential decree was finally signed after being postponed six times in the past six years, Cabinet deputy secretary Erman Radjagukguk said on Wednesday.
The taxes, first proposed by the Ministry of Finance in 1998, will be imposed only on products to be sold on the domestic market and not for export. The implementation will be carried out gradually, depending on the industrial sector.
"Effective from Jan. 1, the taxes will be applied on automotive, cigarette and liquor companies, while electronics products will be subject to similar taxes starting in March," Erman said.
The government has been trying to impose the taxes in order to rectify a "mistake" in the tax policy imposed on the island since it was declared an industrial bonded zone in 1978 to attract foreign investment.
The island has become one of the country's main centers of industry, with export-oriented manufacturing companies accounting for more than 70 percent of the island's economy.
While other industrial centers in the country have faced difficulties, the island prospered -- even during the crisis -- with an annual economic growth of more than 7 percent, higher than the national growth.
A bonded zone is one in which export-oriented manufacturing companies are allowed to bring in capital goods and raw and intermediate materials without paying import duty, VAT or other indirect taxes usually imposed on trading transactions.
However, over time, the tax exemption has been enjoyed not only by export-oriented manufacturing companies but also others that sell products on the domestic market.
This prompted the Ministry of Finance to reimpose VAT on Batam six years ago in a bid to raise revenue for the cash-strapped government. However, strong protest from foreign investors forced the government to postpone it on numerous occasions.
It remains to be seen how businesses on the island will react to the new ruling.
Erman did not address such a concern, nor elaborate on how this would affect the ongoing deliberation of a bill that will turn the island into a free-trade zone (FTZ) -- status that would automatically abolish the need to apply differential tax treatment to domestic and export transactions.
Analysts say applying differential tax treatment, while at the same time preparing a bill that is supposed to abolish such treatment, has the potential to create confusion and even scare away investors from the island.
Some experts have said that turning Batam into a permanent FTZ would boost its attractiveness in the eyes of investors, particularly as the island is now competing for investment with Malaysia's Johor and Vietnam's Ho Chi Minh City, which vie to lure investors as a second alternative to China, the region's greatest magnet for investors.
Batam, located some 20 kilometers from Singapore, is one of the most modern industrial bonded zones in the Asia-Pacific region. Some 650 foreign companies operate on the island, with a combined investment of about US$3.7 billion and a total workforce of 173,000 people.