Batam technically already free trade zone: BIDA

JAKARTA (JP): Batam island has technically become a free trade zone although the law which will formalize its status as such is still being prepared, chief of the Batam Industrial Development Authority (BIDA) Ismeth Abdullah said.

"In its development, Batam has functioned as a free trade zone ... and tax incentives originally intended for industry have also been enjoyed by all the residents of Batam," he said at a seminar on the prospects for Batam here on Friday.

He said that the formalization of Batam's status as a free trade zone was only a matter of time as a draft bill to change the island's status had already been circulated at the government level.

"All the indications (for the establishment of a free trade zone) are very positive, very encouraging. The government has made studies on its viability, and the results have been positive," Ismeth added.

Arif Aryman, an specialist with the Office of the Coordinating Minister for the Economy, confirmed that the government was still formulating the draft bill which would formalize Batam's status as a free trade zone.

He said that the draft bill was currently under discussion at the Ministry of Finance, and it was expected to be finalized sometime this year before being submitted to the House of Representatives for approval.

In an attempt to attract foreign investment and bolster export competitiveness, the government declared Batam, located some 30 kilometers from Singapore, an industrial bonded zone in 1978. In subsequent years, the same status was given to the islands of Rempang and Galang, making a total bonded area of 715 square meters.

Designation as a bonded zone means that all export-oriented businesses can bring in capital goods and raw materials without having to pay import duty, value added tax (VAT), and the other indirect levies normally imposed on such activities.

The tax facilities were later extended to other Indonesian companies even if their production and services were not destined for export. This policy led to resentment among companies based outside the island.

In 1998, the government decided to reimpose valued added tax, one of the tax incentives available in Batam to ensure equitable tax treatment for local companies outside of Batam.

However, the ruling, which was originally to take effect in April last year, was greeted by massive protests both from Batam residents and from foreign industrialists based there.

Arif said that the government had postponed its decision to remove tax incentives pending the formalization of Batam's status, that is, the decision as to whether it was to remain a bonded zone or be converted into a free trade zone.

He stressed that the designation of Batam as a free trade zone was crucial for the country to be able to increase exports, attract investment, increase trade, and stimulate small businesses in the area.

Ismeth said that as a result of the government's decision to impose value added tax, many foreign investors had withdrawn their applications for new investments.

"In 2000, we have had only 49 new investment approvals, when we could have had 100," he claimed.

Ismeth said that the investors were taking a wait-and-see stance as to what the government would decide, and how it would affect their businesses.

However, he said that despite the uncertainty, there were already 14 new investment approvals worth about $22 million in the first month of the year.

"Which clearly shows how valuable Batam is for investment," Ismeth added.

Foreign companies operating in Batam at the end of 2000 totaled 420 companies, and the number was expected to increase to 700 companies in 2005, he said.

Batam's largest investors came from Singapore, South Korea, Taiwan and the United States, with its main products being electronics, steel, pipes, and plastics. (tnt)