Consumption tax in Batam

Consumption tax in Batam

President Megawati Soekarnoputri should be hailed for her
political courage to impose domestic-consumption tax on Batam
island, the bonded zone near Singapore, only a few months before
the presidential election in early July.

Such a painful, fiscal measure certainly will set off
protests, both from general consumers and investors. In fact it
was such strong opposition that had prompted the government to
postpone five times the implementation of the 1998 policy, to
levy value-added tax and luxury-sales tax on domestic consumption
on Batam island.

The President deserved full support for her politically
unpopular, yet economically sensible fiscal measure. She braved
local protests and took the risk of losing political support from
voters, but her decision to push ahead with the long-postponed
measure -- to put Batam under the country's tax regime -- was a
long-sighted move.

This move corrected a major mistake that had been overlooked
since 1978, when the government started an aggressive campaign to
promote Batam as an industrial bonded zone, to attract foreign
investors.

A bonded zone is an economic concept, designed to boost
exports by allowing industrial firms to bring in capital goods
and raw materials without paying import duty, value-added tax
(VAT) and other indirect taxes normally levied on trading
transactions. However, the tax and duty exemptions in a bonded
zone are effective or granted only to export transactions, and
not for domestic sales or domestic consumption.

This means that industrial companies are entitled to such
exemptions only in so far as their imports are meant as inputs
for export goods and their products are entirely designed for the
export market.

By imposing VAT and luxury-sales tax on domestic sales
(consumption), the government also puts Batam under its national
trade regime. As long as Batam remains a bonded zone as it is
now, it should be treated equally with other bonded zones, like
the Nusantara bonded zone near Jakarta's Tanjung Priok seaport.

Hence, tax and duty exemptions are applied only to export and
export-related transactions and not to domestic sales. The
different tax treatment has so far made Batam a bastion for the
smuggling of goods to other islands.

Further postponing the collection of VAT and other indirect
taxes and duties from domestic consumption on Batam is also not
fair to the people in other areas of the country. Why should the
people in Batam enjoy such a special privilege of not paying
taxes on their domestic consumption?

The tax imposition, we think, should not erode Batam's
comparative advantage to attract investors, especially because
the taxes are being imposed gradually, first on motorcycles,
automobiles, cigarettes and liquor, which are hardly manufactured
on that island.

What will greatly concern investors, notably foreign
manufacturers, is not the tax imposition itself but rather the
integrity and technical competence of the bureaucratic machinery
-- tax and customs services -- that will administer the tax and
duty collection.

Different from other bonded industrial zones in the country
which are entirely isolated from residential areas, Batam island
is also a large city complete with a municipal administration and
a wide mixture of many residential areas, trading centers and
industrial complexes.

The government therefore will require special bureaucratic
procedures or safeguards to ensure that the tax and duty
exemptions are granted only to enterprises which produce for
export sales, and that all sales for domestic consumption are
subject to taxes.

But businesses will be greatly worried if this procedure
requires all companies -- even including export-oriented
manufacturers -- to pay up-front duties and taxes on their
imported inputs, because then they would have to routinely haggle
with the poorly paid, highly venal tax and customs officials to
get their tax and duty refunds.

The government, therefore, would be well advised to set up an
expedient bureaucratic system with an effective oversight
mechanism, both to administer the tax and duty exemptions for
export transactions and to collect taxes on domestic consumption.

____________