Benefits of tax holidays questioned
Benefits of tax holidays questioned
JAKARTA (JP): Indonesia must gradually phase out tax holidays
to attract foreign investors who desire a clear, uniform and
consistent tax system, an executive of KPMG consultancy company
said on Tuesday.
Incentives in the form of tax holidays can be
counterproductive to Indonesia's economic goals, Harvey Galper,
the managing director of KPMG's Barents Group, said at a seminar
on the costs and benefits of tax incentives.
"The basic purpose of a tax system is to generate revenue,"
Galper said at the seminar organized by the Public Economy
Research Institute (LPEM), a unit of the economics department at
the University of Indonesia.
Tax incentives not only result in loss of revenue but also
erode the standard of tax systems, Galper said, adding that a
broad-based and low-rate tax system would produce a more
efficient and stable economy.
Tax incentives also are prone to pressure from vested
interests because favoring a particular industry or region
effectively excludes others, he said.
Galper questioned the ability of the government to prevent the
abuse of tax incentives.
Incentives could be abused through accounting schemes which
shift income into the holiday period, he said.
The incentives also encourage the false collapse and
establishment of firms to extend the length of the holiday
period, he said.
Indonesia abolished all forms of tax holidays when it
overhauled its tax system in 1984.
But the government was virtually forced to reintroduce tax
holidays in 1994 as Indonesia competed with other Asian countries
to attract the foreign capital flooding into the region.
Current tax incentives include duty-free imported machinery;
duty-free material for the first two years of production; no
transfer taxes for a company's first ship registered in
Indonesia; immediate expensing of capital depreciation and
amortization; compensation for losses and reduction of income
taxes.
The government also will bear the income taxes of new firms in
selected industries for the first 10 years of their operation.
Firms operating in export-processing zones, in eastern Indonesia
and in designated economic growth centers also will benefit from
tax incentives.
Galper said foreign investors were more interested in a
"reasonable tax law that is reasonably administered".
A tax law should be neutral and efficient, easy to understand
and administer, as well as stable and predictable, he said.
Consistency and uniformity, an appropriate penalty structure
and cost effectiveness also are important elements of a tax
system, he said.
A researcher at LPEM, Raksaka Mahi, also doubted the
effectiveness of administering tax incentives.
Tax administrators find it easier dealing with uniform rules
rather than with exemptions, he said during the seminar.
Giving tax incentives also runs counter to the current budget
deficit situation, which calls for more tax revenue, he said.
Raksaka also called for the more effective implementation of
tax incentives to plug loopholes in the existing regulations.
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