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.