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. (03)