Govt delays tax plans for Batam Island

Dadan Wijaksana, The Jakarta Post, Jakarta

Minister of Finance Boediono said on Monday the government had delayed plans to impose value-added tax (VAT) and luxury tax on Batam island in Riau province, pending the completion of a bill that would allow the industrial island to become a free trade zone.

"This has something to do with the bill. It has yet to be completed at the moment, so we're extending the period of tax exemptions on Batam," he was quoted by Detik.com online as saying.

The plan to tax Batam island was drawn up in 1998 by the government, under pressure from the International Monetary Fund, in a bid to collect more tax revenue to help finance the state budget. But the plan has been delayed a couple of times due, in part, to protest from businesses on the island. Based on the last deadline, the VAT and luxury tax plans were supposed to be implemented on July 1.

This means that for the time being, Batam island will continue to enjoy tax incentives.

Batam, located in the Riau archipelago, some 20 kilometers south of Singapore, was initially declared an industrial bonded zone in 1978 to attract foreign investment and bolster export competitiveness.

Since then, Batam has become the country's main center of industry, where 70 percent of the economic growth is contributed by an export-oriented manufacturing sector, with 100 percent of its products exported.

The value of exported goods from the island last year totaled US$ 5.7 billion, or some 14 percent of the country's total non- oil and gas export revenue.

However, the island has technically acted as a free trade zone for 10 years to 15 years, and tax incentives originally intended for industry have also been enjoyed by all residents of Batam, including Indonesian companies there providing products and services not destined for export. This freedom has led to resentment among companies based outside the island.

The finance ministry then moved to impose VAT and luxury tax in Batam.

But the plans drew protests from the Minister of Industry and Trade, saying that the reimposition of such taxes would likely scare investors away.

The ministry then called on the finance ministry to extend the tax facilities, waiting for the enactment of the bill, which would give the island free trade zone (FTZ) status.

FTZ status would enable companies on Batam to import goods without paying customs duties and taxes, pending their eventual processing, transshipment, or reexport.