Bonded zones for Batam

Bonded zones for Batam

The government has finally moved firmly to resolve several
years of controversy and political debate over the status of
Batam, an island 30 kilometers southeast of Singapore, by
declaring it only to be an enhanced bonded zone, not a full free
trade zone (FTZ) as demanded by foreign and domestic investors.

The decision ends, for the time being, the political move to
turn Batam into an FTZ, which reached its height in September,
2004 when the then House of Representatives unilaterally approved
a House-initiated bill conferring FTZ status on the island. The
legislation never came into force as the Constitution stipulates
that both the government and House must give their approval to a
law.

By virtue of Finance Minister's Decree No.60/2005 issued last
month, Batam and its surrounding islands of Bintan and Karimun in
the Riau archipelago are given the status of enhanced bonded
zones, or enclave FTZs.

This means that exemptions from import duty and other taxes
due on imports are granted only for imports used in the
production of exports, rather than those intended for domestic
consumption. Hence, manufacturers entitled to such exemptions are
only those located in industrial estates (areas) already
designated as bonded zones and only when their imports are meant
as inputs for export goods.

Similar to the Nusantara bonded zones at Cakung in Jakarta and
near Belawan seaport in North Sumatra, imports from foreign
countries and from the Indonesian customs area into the bonded
zones in Batam, Bintan and Karimun are exempted from import duty
and other taxes related to imports, and are not subject to
physical customs inspection. However, exports from the bonded
zones into the Indonesian customs area within the islands and
other parts of the country are subject to import duty and other
taxes due on imports.

We agree with the government's argument that granting Batam
and the other two islands FTZ and free port status would be
economically and fiscally ill-advised for the long-term good of
the national economy and could set a dangerous precedent, which
could trigger a string of new demands for similar facilities from
the people on other islands.

Anyway, returning Batam to the national tax regime is not
really a drastic move that would scare away investors as
consumption taxes have after all been imposed on several goods
there. Since early 2004, domestic sales of motor vehicles,
tobacco and cigarettes, liquor and electronic goods in Batam have
been subject to value added tax and luxury sales tax.

The bonded-zone concept makes a lot of sense as, unlike other
bonded industrial zones in the country that are entirely
isolated from residential areas, Batam has developed into a
large city complete with a municipal administration and a wide
mixture of residential areas, trading centers and industrial
complexes. Manufacturing is only one part of its mainstream
economic activities.

Making the whole of Batam island an FTZ could turn it into a
bastion for import smuggling to other parts of Indonesia,
especially as Batam and the other two islands have small seaports
that are difficult to oversee.

The government, however, should ensure that the flow of goods
into and out of the bonded zones is truly smooth, free from
harassment by the customs service, tax officials and the national
police.

Also important is that the process of licensing and
designating industrial areas/estates as bonded zones should be
made transparent, expedient and free from corruption --
otherwise, many export-oriented industrial plants may decide to
move to other bonded zones overseas.

True, as the proponents of FTZ status have argued, a bonded zone
that uses a system of bonded warehouses to transship goods
between suppliers, factories and customers is costlier to operate
and often causes delays associated with customs clearance,
especially with Indonesia's customs service perceived to be one
of the most corrupt public institutions in the country.

This is the main concern the government should address, by
designing effective administrative machinery for the bonded zones
that is capable of minimizing the encumbrances involved in
shipping materials.

Smooth imports and exports are quite vital as the types
of industrial companies operating in Batam are highly mobile and
highly sensitive to factors that delay goods shipments or
increase costs.

The enhanced bonded zone system should, therefore, ensure that
greedy customs and tax officials have little opportunity to
hinder the flow of goods for their own personal gain.